How Inflation is Impacting Household Debt in BC

Several white arrows pointing upwards on a wooden wall

While many economists and governments predicted that sudden and rapid price increases would only be temporary, persistent inflation is still present in the economy despite the recent interest rate increases from the Bank of Canada (“BoC”). The BoC raised the benchmark interest rate by a quarter point earlier this week, and many signs point to further rate increases later in the year. The “easy money” cycle we saw from 2009 to 2021, where interest rates were at a prolonged, low level, appears to be in the rear view mirror.

As Licensed Insolvency Trustees, we continue to see how inflation has a negative impact on our clients and their ability to manage their debt. Here are some of the ways inflation is affecting individuals and families in BC:

1. Increased Interest Rates

When inflation rises, central banks often respond by raising interest rates to curb excessive borrowing and control inflation. Higher interest rates can make borrowing more expensive for households with existing debt, especially if they have variable interest rate loans. This can lead to higher monthly payments, making it harder for households to manage their debt obligations.

2. Reduced Purchasing Power

Inflation erodes the purchasing power of money over time. As prices increase, the value of each unit of currency decreases. This means that the same amount of debt that a household owes becomes relatively larger in real terms. If wages and income do not keep pace with inflation, households may find it increasingly difficult to pay off their debts.

3. Strained Household Budgets

Inflation can put pressure on household budgets as the cost of goods and services rises. When inflation outpaces wage growth, households may struggle to keep up with the increasing prices while simultaneously trying to manage their debt payments. This can lead to financial stress, making it challenging for households to meet their debt obligations and increasing the risk of defaulting on their payments.

4. Negative Impact on Savings

Inflation can also erode the value of savings. If the interest rate on your savings accounts does not keep up with inflation, the purchasing power of the saved money decreases over time. This can make it harder for households to build an emergency fund or accumulate savings to pay off their debts, further worsening their debt burden.

5. Uncertainty & Financial Planning Difficulties

Inflation introduces uncertainty into the economy and financial markets. Unpredictable inflation rates make it challenging for households to plan for the future, especially when it comes to debt repayment. It becomes harder to forecast income growth, interest rates, and the overall cost of living, which can complicate budgeting and financial planning.

Overall, inflation is making it more difficult for households to manage and pay off their consumer debts. It is essential for households to be mindful of inflation and its potential implications when managing their debt obligations. If you’re struggling with a significant amount of debt and you’re only able to make your minimum payments, it might be time to reach out to a Licensed debt professional for some help. Book a free consultation now with a Licensed Insolvency Trustee to learn about the government-regulated debt relief options available to help reduce and eliminate your debts.