26th August 2026
There is a more worrying story developing beneath Britain's cost-of-living figures.
Inflation may be nowhere near the 11.1% peak reached in 2022, but that does not mean households have recovered from the financial shock of the past few years. For many families, the problem has moved from paying higher prices to finding ways of paying the bills at all.
Energy arrears are rising. Council tax debt is increasing. Credit-card borrowing is accelerating. Some households are facing higher mortgage payments as fixed-rate deals expire.
Taken individually, each figure can be explained away. Taken together, they suggest something more uncomfortable: an increasing number of households are using debt to bridge the gap between their income and the cost of everyday life.
The latest figures on energy debt provide perhaps the clearest warning.
Energy UK says household energy debt reached £6 billion by June 2026, having increased by around £500 million over the previous year. It estimates that the figure could reach £7 billion by the end of this year.
That is not simply a problem for energy companies.
It is evidence that some households are no longer able to absorb their energy costs from current income.
And the timing could hardly be worse. Ofgem has confirmed another 4% increase in the energy price cap from October, taking the typical annual bill to around £1,723.
For a household already carrying an energy debt, another increase creates a particularly difficult situation.
It is trying to pay today's bill while also paying yesterday's.
Council tax debt tells a similar story
The latest figures from England show council tax arrears reaching a record £7.4 billion at the end of March 2026, an increase of £782 million, or 11.8%, in one year.
Scotland uses a different statistical system, so the English figure should not simply be presented as though it applies to Scotland. But the Scottish figures also show some deterioration.
In 2025/26, Scotland collected 95.2% of council tax billed, compared with 95.5% the previous year. That may look like a small change, but across £3.389 billion of council tax billed, even a modest deterioration represents substantial money.
And there is evidence from debt advice organisations that people who are already struggling can owe substantial amounts.
StepChange reported in March that the average council tax arrears among its clients had reached £2,137, compared with £1,146 in 2019. That is an 86% increase.
This is an important distinction.
A household that is late paying one council tax instalment is not necessarily in serious financial trouble.
But when council tax arrears run into thousands of pounds, the problem is clearly much more serious.
Then there is the credit card
Perhaps the most revealing development is what is happening with unsecured borrowing.
Bank of England figures show that households borrowed £1.8 billion in consumer credit during June, with credit-card borrowing accounting for £900 million of that. Credit-card borrowing had increased from £600 million in May.
Annual credit-card lending growth reached 12.5% in June, according to the Building Societies Association's analysis of the Bank's figures. It was the highest rate since January 2024.
This doesn't necessarily mean that every household taking out a credit-card balance is in financial difficulty.
Credit cards are used for convenience, purchases and short-term cash flow.
But the combination of rapid credit growth and rising arrears is something economists watch closely.
The Bank's Credit Conditions Survey provides another warning. Lenders reported that defaults on unsecured lending increased substantially in the second quarter, with the net balance reaching a level not seen since the financial crisis.
That is much harder to dismiss as simply people choosing to borrow.
It suggests that some borrowers are beginning to find repayment more difficult.
Mortgages are different — and that matters
There is an important qualification to the gloomy picture.
Mortgage arrears have not been spiralling upwards in the same way as energy and council tax debt.
UK Finance reported 79,110 homeowner mortgages in arrears of at least 2.5% of the outstanding balance in the first quarter of 2026, actually 2% fewer than in the previous quarter.
The Bank of England also says that the share of mortgages with more than 2.5% of the balance in arrears is around 0.9%, close to long-run averages.
So it would be wrong to claim that Britain is currently experiencing a mortgage-arrears crisis.
But that does not mean mortgages are no longer a problem.
The issue is increasingly the future cost of refinancing.
Millions of households will eventually have to replace fixed-rate mortgages arranged when interest rates were much lower. The Bank of England estimates that around five million households could see their mortgage repayments increase by the end of 2028 under its latest projections.
For some borrowers the increase will be manageable.
For others, it will arrive after several years in which energy, food, insurance and other household costs have already risen.
The dangerous part is the interaction between the debts
This is perhaps the most important point.
A household doesn't have an "energy problem", a "council tax problem" and a "credit-card problem" sitting in three separate boxes.
They all come out of the same income.
Imagine a household that has historically managed its finances reasonably comfortably.
Energy prices rise.
The household cuts back on other spending but still has a shortfall, so it allows the energy account to fall into arrears.
Council tax rises and another bill is missed.
A credit card then becomes the means of paying for food, repairs or an unexpected expense.
The credit-card balance grows.
Eventually the household's fixed-rate mortgage ends and the new payment is higher.
Suddenly the problem is no longer a temporary cash-flow difficulty.
The household has accumulated several forms of debt at once.
That is where the situation can become difficult to reverse.
Britain is not facing a household debt crisis — yet
This qualification is important.
The Bank of England says household balance sheets remain relatively strong overall. Household debt as a proportion of income has fallen considerably from the levels seen before the 2008 financial crisis. The Bank estimates the household debt-to-income ratio at around 130%, compared with an average of 155% since 2000.
The Bank therefore does not currently see widespread household financial instability.
That is reassuring.
But averages can hide the people at the sharp end.
The Bank estimates that the proportion of households with particularly high debt and essential-cost burdens increased slightly to 1.6% in the first quarter of 2026, and could rise to 1.8% if energy prices remain persistently high.
For those households, there isn't much left to cut.
They have already reduced discretionary spending.
The next step is often to postpone payments, borrow or accumulate arrears.
And that could have consequences for the wider economy
This is where household debt becomes an economic issue rather than simply a personal one.
A heavily indebted household cuts spending.
It may stop eating out.
It may postpone replacing the car.
It may delay buying furniture.
It may cancel holidays.
It may put off home improvements.
Thousands or millions of households doing the same thing can weaken the economy.
Businesses then experience lower demand.
Some reduce investment.
Some reduce staff.
Some fail.
That can produce a second round of financial problems for households.
There is therefore a potentially unpleasant feedback loop:
higher costs → greater borrowing → higher repayments → reduced spending → weaker businesses → weaker employment → even greater financial pressure.
The irony is that attempts by households to maintain their standard of living through borrowing can eventually make the economy weaker.
Energy debt has another sting in the tail
There is also a cost to everyone else when energy customers cannot pay.
Ofgem's latest data show that energy suppliers have been carrying substantial bad-debt and debt-administration costs. During the worst part of the energy crisis, quarterly debt-related costs rose dramatically, reaching £575 million in late 2023. More recently they have fluctuated but remained significant.
Ultimately, some of those costs feed into the wider energy system.
So there is a vicious circle.
People cannot afford their energy bills.
Energy companies accumulate bad debt.
The cost of dealing with that debt becomes part of the cost of supplying energy.
Other customers therefore pay some of the cost.
And if energy prices rise again, the cycle can start all over again.
What happens if this continues?
The most obvious danger is that debt becomes structural rather than temporary.
During a normal period of financial difficulty, a household might borrow for a few months and then repay the money when income improves.
But what happens if income never catches up with the accumulated increase in essential costs?
The household begins carrying yesterday's spending into tomorrow.
A credit-card balance becomes a permanent liability.
Energy arrears require a repayment plan.
Council tax arrears are pursued.
A mortgage is refinanced.
And an increasing proportion of monthly income goes towards dealing with the past rather than paying for the present.
The result is a household with less financial resilience.
An unexpected boiler repair, car problem or period without work can then become the event that pushes it into serious financial difficulty.
The future could therefore be determined by what happens to energy and interest rates
This is why the next few months matter so much.
If energy prices fall, inflation continues to moderate and interest rates can eventually come down, household finances could begin to stabilise.
Some households will then have the opportunity to pay down debt.
But if energy prices remain high, inflation proves stubborn and interest rates stay higher for longer, the pressure could continue.
The Bank of England has already warned that persistently higher energy costs would push the proportion of household income devoted to debt servicing higher. In its scenario analysis, the debt-servicing ratio could rise from around 7.5% to a little above 8% by the end of 2028. When essential spending such as energy is included, the burden is considerably greater.
That doesn't amount to a prediction of a financial crash.
It is something more subtle — and potentially more important for ordinary families.
Households can remain technically solvent while becoming financially exhausted.
They pay the mortgage.
They pay the credit card.
They eventually pay the council tax.
They make arrangements with the energy company.
But there is nothing left at the end of the month.
The danger for the future
The real consequence of rising household debt may therefore not be a sudden crisis.
It could be a prolonged period of weaker household spending and lower financial resilience.
People who would once have saved £200 a month may save nothing.
People who would have invested in their homes may postpone the work.
People approaching retirement may find their savings have been used to pay bills.
Younger households may accumulate credit-card and loan debt instead of building deposits for a home.
And families already on low incomes may have no savings to fall back on at all.
That creates a very different kind of cost-of-living crisis.
The original shock may have been inflation.
The next phase could be the debt left behind by inflation.
And that debt does not disappear when the inflation rate falls.
This is why the latest figures deserve attention.
Britain isn't currently facing a 2008-style household debt crisis. The Bank of England is quite clear about that.
But the warning signs are becoming more visible at the edges: £6 billion of energy debt, record council tax arrears in England, rapidly growing credit-card borrowing and rising unsecured-loan defaults.
Mortgage arrears remain relatively contained, but millions of borrowers still face the possibility of higher repayments as fixed-rate deals expire.
The question is therefore not simply whether Britain can get inflation back to 2%.
It is whether household incomes can recover sufficiently to allow families to repay the debts accumulated while inflation was high.
Because if they cannot, the cost-of-living crisis may continue long after the inflation statistics tell us that it has ended.