As debt levels rise, consumers start to feel the reality of the credit crunch

By MoneyhighStreet Staff. Published on August 1, 2008 This post currently has no comments.

Big decision
Rising debt levels, fuel costs and the price of food are likely to force consumers to cut back their spending in the second half of the year, a new report has warned.

The latest research from the Alliance Trust showed that household consumption grew slightly during the first half of the year, even though food and energy prices rose and debt levels soared.

However, the survey indicated that the financial reality of the credit crunch is now beginning to hit home. It suggested that high mortgage payments and inflationary pressures are outstripping wage rises, meaning that consumers are being forced to reign in spending.

Rising debt and falling house prices also mean that household net wealth is predicted to slump even further in the coming months.

"Consumers are currently facing the worst financial reality ever in the 11 years of our study," commented Shona Dobbie, the head of the Alliance Trust research centre.

"Households now have to spend more on their mortgage repayments and council tax bills, combined with the fact that their real earnings are failing to keep up with inflation, and so they are feeling poorer and having to cut back in some areas of spending."

Recent figures from Credit Action indicated that consumer debt in the UK stood at £1.44 trillion, up 7.4 per cent in the last year.