The Bank of England has warned that there is a high risk of becoming stuck in a debt deflation trap; this means that prices will fall yearly rather than rise. This may sound good on the face of it but it does mean that many families across the UK who have a large personal debt will see that debt rise even more.

The Bank said: “Falling prices will increase the real debt burden for borrowers in terms of the principal repayments and the ongoing interest payments (for fixed-rate loans at least). This is known as the debt deflation mechanism.”

It adds: “To the extent that borrowers are committed to fixed interest rate payments on their loans, then the burden of real interest payments will be correspondingly greater too. In the United Kingdom, some 40 per cent of mortgages are on a fixed-rate basis. And real interest payments would also increase if nominal interest rates did not fall in line with inflation either because policy is prevented from doing so (as discussed in the next section) or because banks increased their lending margins.”