This caused a self-fulfilling spiral between households, companies and banks that deepened the recession and strengthened the instability of the financial market. To sum up, the cost of living increase has meant that households' incomes could not keep up with increasing costs. Low-income households and households with large variable rate loans have been particularly affected.
The foundations of financial stability can still be shaken even if there are no mass defaults, because households' consumption may decline sharply in response to lower real income and the "wealth effect". This could reduce output and increase the probability of recession, and potentially result in higher risks to banks' asset quality through corporate defaults.