The problem of debt – has it really gone away?

This article from The Guardian today led me to think about the problem of debt, and the possible implications of an increase in interest rates in the future.

http://www.theguardian.com/money/2015/sep/08/problem-debt-number-of-households-affected-rises-by-a-quarter

With the proportion of households spending more than 25% of their gross income on repaying debt growing by more than 25% between 2012 and 2015 this presents a real problem for the Bank of England’s MPC as it starts to consider normalising interest rates by edging them upwards.  Any increase in rates will push a significant number of these households into the financial abyss, which could have knock on effects for banks and other lenders.  Furthermore, such households will attempt to cut their spending even further, thus reducing aggregate demand.

However, if the MPC sees inflationary pressure ahead it needs to act quickly.  This will prove to be a difficult balancing act and it will be interesting to see how they proceed.

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