Bank forecasts more inflation: what it means for you

BoE quarterly Inflation Report press conference

The Bank of England has issued its inflation forecast, and it makes worrying news for us all. It says inflation during 2017 will be 2.7% - up from a prediction of 2% back in August. The experts agree that we will finally see prices at the supermarket rise, along with a number of key costs. So where will inflation hit you hardest?

The supermarket
The Bank has warned that the collapse in the pound means that the cost of absolutely everything we import will go up: this includes food. Lisa Caplan, Head of Financial Advice at Nutmeg, says that so far we have been protected by fierce price competition at the supermarkets, and pressure from the discount players. However, she warns that the price of all imports will rise 9% by early summer next year, and this is eventually going to feed through into supermarket prices.

The high street
The cost of clothing is also expected to rise significantly - because so much of our clothes are imported. Given the fact that price competition in the clothing sector is less full-on, retailers will be faster to pass price rises onto consumers. You could, therefore, easily see the cost of clothes up almost 10% well before next summer.

Caplan says: "The Bank reports that the pound has fallen 21% since its peak in November 2015, and 15% since Brexit. This is a massive blow to UK holidaymakers, and the Bank offers little hope that the currency will recover its strength in the foreseeable future." This means that having exactly the same holiday as you did last year will cost you at least a fifth more. As holiday companies put up their prices to take account of the currency shift, there's also a real risk that they take the chance to add an extra slice of profit for themselves too.

The environment is downright miserable for savers nowadays. Interest rates remain at rock bottom, so inflation is eating away at the value of their savings. Caplan says: "There is no real respite for savers: rates will remain very low, and current bank interest rates will not be recovering in the foreseeable future. So savers who want their money to work harder for them, and beat inflation, will need to look at investing their money."

She adds: "This is a double blow for people who live off their savings. The cost of living will rise but for now interest rates remain at historic lows. So savers will be getting little interest, but will have to spend more.

Credit card bills
There's a real risk on the horizon. Prices are rising, and while some people will tighten their belts even further, there's a risk that others will turn to borrowing. Caplan says: "Consumer credit should remain cheap - so families who sometimes rely on credit cards or payday loans should still have access to this kind of credit should they need it. But increasing your household debt is a timebomb that'll be triggered when interest rates do eventually rise."

The good news
There is one group of people for whom inflation is better news: borrowers. Interest rates are likely to stay low in this environment, and inflation will eat away at the value of the outstanding loan in the same way it eats up savings - so loans will look less dramatic than when they were first taken out.

And the big question
Just how badly all this inflation hits us will depend on what happens to wages. If they keep pace with inflation then some of our biggest concerns will ease, because we will have more money to spend on more expensive groceries and holidays. If, however, they fail to keep pace, we will all feel the pain.

Things don't look brilliant for wages, and back in May, the Chartered Institute of Personnel and Development estimated that pay growth would be just 1.7% by May 2017. We can only hope they were wrong.

Most common causes of debt
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Most common causes of debt

There are some very common reasons for building up problem debts. Here we reveal seven of the most common, and what you can do if you face them.

Unemployment or illness that means one or more of the household’s earners are unable to work will bring a profound change in family finances, and according to the Money Advice Service is the most common reason for getting into problem debt.

If your circumstances change, therefore, you need to immediately address your family finances, and put everything on a minimum spend lockdown. You should also look into the benefits and tax credits that are available sooner rather than later, to try to close the gap.

If you are on the kind of contract that means varying hours, it can be incredibly difficult to work out what you can afford to spend - making it the second most common reason for getting into debt - according to the Debt Support Trust.

Rather than swinging through the extremes from week to week, the best approach is to establish a budget that will work in the leanest of months, so you don't find yourself getting used to the months when you work more hours.

According to Citizens Advice, trying to service too much debt is the third most common reason for getting into difficulties. The TUC found that those with problem debts spend 40% of their income on debt repayments.

If you are in this position, you officially need some help with your debt problems. If you continue to rob Peter to pay Paul, you will end up owing more and more, so you need to take stock and talk to a debt charity about all your options.

The double-whammy of the legal bills combined with the incredible cost of establishing two separate households is enough to make divorce or separation the fourth most common reason for going into debt - according to the Debt Support Trust.

There's no easy solution, but if you are going through this, it can be helpful to talk through your financial situation with someone you trust or a debt charity, who can help you balance a stretched budget.

Problem debts aren’t necessarily caused by a sudden shock to the system. According to the Money Advice Service, 20% of their clients are simply trying to live on an unsustainably low income.

If you are in this category, it’s important to seek help on the benefits and tax credits you may be able to receive. It’s not always easy to navigate the system, but charities like StepChange have experts on the benefits system who can talk you through what’s available.

The combination of rising costs and stagnating wages over the last few years has meant increasingly people saw their monthly wage cover less and less of their monthly outgoings. This position has started to ease more recently, but has left many people far worse off than before the financial crisis. The Money Advice Trust said a combination of this and unexpected costs was responsible for almost one in ten problem debts.

If you consistently spend more than you are expecting, it's well worth keeping a spending diary. That way you can establish the real cost of living, and start to identify where you can cut costs.

The Money Advice Service says it commonly deals with individuals who have struggled to get to grips with budgeting and debts, and have got into debt because they don’t have the skills and knowledge to manage their money effectively.

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