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Interest Rate Hikes Are Drowning Us in Debt

Joe Cox

Today's interest rate hike will force millions of households to borrow just to make ends meet while doing nothing to curb inflation caused by the rich. We need a debt write off to escape the cost of living crisis.

(Kiwis / Getty Images)

There are several lights now flashing red on the dashboard: the gap between income and inflation, growing household borrowing and the rising cost of that borrowing.  

There is a relationship between these developments, but it isn’t the one you have most likely heard about, the so-called ‘wage-price spiral’. The wage-price spiral is the bogus idea that wage increases cause price increases which in turn cause workers to demand and win wage increases, creating a feedback loop that drives up inflation. A brief look at what is happening to workers’ wages shows us that this idea should not be taken seriously.  

The wages of British workers had flatlined for a decade, even before the recent spike in inflation. Pay is now growing at 5.9 percent, significantly below CPI inflation, which is running at 10.1 percent. These nominal income increases nowhere near match the ballooning costs of essentials, with food inflation alone growing at 19 percent. The fact that 2022 was the worst year for real wage growth in half a century should end any debate about a wage-price spiral.  

Higher input prices (how much it costs to create a product or service) have played a significant role in elevated inflation, but gas prices have now returned to mid-2021 levels. Profiteering increasingly looks like the key culprit in driving and keeping prices higher, especially in energy production, shipping, logistics and food production.  

However, the government and their corporate backers have very little interest in tackling excessive profits. Instead, they have outsourced responsibility for inflation to the Bank of England, who use the blunt tools they have—raising interest rates and unwinding ‘quantitative easing’. Today, the Bank has raised interest rates for a twelfth consecutive time, up to 4.5. percent, the highest level for nearly 15 years, in an attempt to bring down inflation by suppressing demand in the economy by incentivising saving and reducing spending. 

These policies hurt working people in two ways. Firstly, through reducing economic activity, there is less demand for goods and for labour to make those goods, and so unemployment rises, meaning workers have less power to negotiate for higher wages with employers. 

Secondly, the rising costs of borrowing hurts those of us that rely more on wages than returns from savings and assets—which includes the vast majority of the working class but excludes the most of the richest in society. Two and a half million households will be exposed to higher mortgage rates this year. According to the Bank of England, this will increase average monthly repayments by around £250.  

The latest projections from the central bank are that the share of households that will be highly burdened by their mortgage costs will increase to 2 percent this year, affecting around 110,000 households. The last time this measure reached this high was in 2007. According to Which?, almost three-quarter of a million households missed their rent or mortgage payment in April.

Every month working people and their families are getting poorer, and increasingly the only option to put food on the table or power our homes is to take out more credit or delay bill payments. Around fifteen million people in the UK are now using credit to pay for essentials. Overdraft charges, credit card borrowing rates and interest rates for five and ten-year loans have hit a decade high. 

Tackling the household debt crisis requires a shift in economic policy to tackle inflation by clamping down on profiteering through hiking taxes on wealth and profits, and by and raising incomes through measures such as strengthening trade unions and increasing the minimum wage and welfare payments. But raising incomes along won’t be enough to support those already drowning in unmanageable debt. That’s why we need a write off of unaffordable personal debt to give people a chance to rebuild their lives.

As we know all too well in the labour movement, this shift won’t come because of the strength of our argument alone. There are winners from the debt crisis: lenders, collectors, debt purchasers, and bailiffs, all of whom are more than happy with the status quo. 

We will only win when we, as people who are reliant on credit to survive and are one paycheque away from a debt spiral, build our collective power by linking up with broader labour struggles to force change.