Inflation Trends: What Do They Mean for Your Debt?

Published July 2021
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Inflation hikes the cost of living, making it more difficult to make ends meet with the money on hand. Learn how to manage your debt despite inflation.

Key Points:

  • Inflation reduces the purchasing power of money.
  • Healthy inflation stimulates spending and the economy, but it can be bad news for debtors.
  • Due to the Fed’s economy-stimulating efforts, inflation is on the rise in the US.

Inflation is a financial fact of life, but what is it, exactly?

Here’s a simple definition: Inflation represents the gradual or sudden loss of purchasing power accompanied by increasing product and service prices.

Inflation is a function of the Consumer Price Index (CPI), which uses a mathematical formula to capture price increases.

Consumer prices tend to increase in direct proportion to the available money supply if the other variables impacting prices, such as the velocity of money (the rate at which consumers and businesses collectively spend money) and the real output of the economy (GDP), remain constant.

Current US Inflation Trends

The ongoing global pandemic has upended economies world-over, and the US economy is no exception. Economic output dwindled, and the economy would have ground to a halt had the government not injected more money into it.

As the US money supply expands at never-before-seen rates, inflation is likely to increase as well. The only way to temper that trend is to decrease the velocity of money while increasing the GDP.

Although the Fed has already taken some steps to address the issue of inflation, the full effects of the massive money supply increases are still surfacing.

So, it is hardly surprising that inflation rates have shot up during the first half of the year.


(Source: US Bureau of Labor Statistics)

The Fed has also raised its expectations for inflation considerably. In May 2021, the annual inflation rate reached 5%, outpacing all previous months, hitting the highest level of the last decade, according to

What does soaring inflation mean for you?

  • Your money will buy less.
  • Price-hikes will accelerate.
  • Your savings will take a hit purchasing power-wise.
  • You will want to spend your money today instead of tomorrow when it will buy you less.

Inflation and Debt: Good News and Bad News

How does inflation relate to debt? Does it help or hurt debtors?

There are two basic scenarios in which inflation may help borrowers.

  1. If you already had debt before the current inflation trends came into play, and your paycheck is now heftier due to inflation, you may find it easier to pay off debt because you still owe the same amount of money, but your pay increase may help you pay debt down faster.
  2. If inflation is expected to continue to rise, it may make sense to borrow now. Due to inflation, you may end up paying off debt that represents more purchasing power now with money that is worth less in the future

Inflation and debt can also hurt you, whether you’re already indebted or will become indebted as a result of inflation.

  • As prices go up, more people have to resort to credit to buy big-ticket items. Thus, more may end up in the debt trap, in need of debt relief.
  • Higher prices mean bigger loans and more credit usage. More debt means that credit users will pay more interest over a longer period.
  • Inflation can thus increase the total cost of consumer debt.

Inflation can increase the already steep cost of debt.

  • The most significant threat of carrying debt during times of inflation is that inflation increases the cost of living, wreaking havoc with your budget. With food, transportation, and accommodation prices going up, you could find less money to put into debt payments, even if your wages go up. Struggling against the tide, you may take longer to pay off your debts, which means you will pay more interest overall.
  • To contain runaway inflation, central banks may hike interest rates to temper money velocity. This means more expensive loans and higher costs for those already indebted. This is especially true of credit card debt or debt on loans with a variable rate.

If you are already in debt, Inflation can hurt you in more ways than it can help you. Since all signs point to increasing inflation in the coming months (and perhaps years), it makes sense to address your debt now rather than waiting any longer.

Credit card debt is the most expensive form of debt, and inflation makes it even more damaging to your financial status. Take action today. Contact a ClearOne Certified Debt specialist at 866-481-1597 to discuss the credit card debt relief options available to you and get a free savings estimate.

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The data and statistics referenced come from multiple credible resources that are cited throughout. ClearOne makes no representations or warranties regarding the accuracy of the information from these various resources and are providing the content for informational purposes only.

Topics: Financial Education