It seems that we are faced with worrying new economic problems on an almost daily basis at the moment as the newspapers print evermore concerning reports of the latest floundering companies, unemployment stats, rising prices and fears for the global economy.

One of the most common phrases heard this year is 'the credit crunch' - which refers to the current crisis in the banking industry. Originally the situation arose in America with banks investing heavily in risky sub-prime mortgages and complicated financial products. As these loans began to default in massive quantities, banks went either bankrupt due to their risky lending policies or were bailed out by the government. The problem has since spread to the UK, as global banks are strongly linked and have packaged investments in each others' institutions - and there was widespread concern that UK banks had dangerously overextended themselves, lending out far too much in these risky packaged loans which might never be recovered - and failing to collect too few deposits in terms of customer savings.

This was combined with an overall culture of credit based spending and a reduced emphasis on personal savings. As a result, the nation is now extended and the debt needs repaying! Quite simply, until the banks can regain their deposits base, and rein in their debts - and customers can do the same on an individual basis - there will be a lack of available credit. This can either be in terms of fewer cheap credit cards, or - as we've seen - far fewer competitive mortgages as banks are increasingly reluctant to lend to each other for fear of their rival's stability.

Hence, the credit crunch is one side of the current economic turmoil.

Inflation on the other hand happens when prices rise, usually as a result of increased demand or increased costs of production. Inflation tends to have a knock on effect - for example, rising grain prices as a result of bad harvests last year caused supermarket prices in the UK to rise. Oil and energy price rises have contributed equally to shop prices rising as transportation and distribution/manufacturing cost increases have to be passed on to the eventual customer.

Equally, inflation and interest rates are also strongly linked. For this reason the Bank Of England seeks to control rising inflation through setting interest rates. High interest rates tend to rein in spending (on credit) and increase savings deposits, reducing spending demand and reducing inflation - and vice versa.

Currently we are seeing low interest rates - likely to go even lower - as the danger of high inflation is subsiding, as grain and oil prices are stabilising. Interest rates have been set lower in a bid to re-stimulate the economy whilst keeping an eye on inflation. So for this reason the credit crunch may not have a causal effect on rising inflation - but it is certainly an intrinsic part of a wider economic problem and we may see ongoing issues with fluctuating inflation, interest rates - and general economic health before the credit crunch ceases, the banks begin to start lending to each other - and consumers again - and the economy begins to return to working order.