Inflation and declining wages hit household finances

Household finances have come under increased strain as income levels drop but the prices of goods and services rise.

According to the ‘Household Finance Index’, which is based on a survey of around 2,000 UK households, some 30% of households reported a deterioration in their finances in August. Only 6% reported an improvement.

Household sentiment also took a hit, according to the research by Markit and YouGov. Job security was partly responsible for falling morale, particularly among public sector workers who face significant cuts as the government tries to reduce public sector spending. Widely- reported falling house prices also weighed on confidence.

Households remain pessimistic about the outlook for their finances over the next 12 months, the research found. Just under half expect their finances to get worse in the next year, with only 25% anticipating an improvement.

Tim Moore, Economist at Markit, said: ‘Household finances continue to suffer from a backdrop of squeezed disposable income, stubbornly high inflation and ongoing public sector spending cuts. Meanwhile, job security in the private sector fell at the fastest rate for 13 months, suggesting that the renewed bout of employment concerns has reverberated beyond the public sector.’

The number of people unemployed in the UK fell by 49,000 to 2.46 million in the three months to June, the latest figures show. However, the government is expecting public sector spending cuts to result in between 500,000 and 600,000 jobs to be lost in the public sector and between 600,000 and 700,000 to disappear in the private sector by 2015.

Inflation

The balance of households saying that goods and services had got more expensive hit its highest since the survey began 18 months ago. The latest official statistics on inflation show that it dipped slightly in July, although food and non-alcoholic beverage prices were on the rise.

The Bank of England expects consumer price inflation to remain above the 2% target until the end of 2011. This forecast was reflected in the Household Finance Index result, which showed a record 86% of respondents expect a rise in their cost of living over the next 12 months.