Households squeezed by sharp rise in living costs

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Household budgets suffered a "further steep deterioration" earlier this month, dealing a blow to hopes of an increase in consumer spending after a dire first three months of the year, according to an influential survey released this morning.

The grim data is accompanied by a separate warning from independent forecasters using the Treasury's own economic model that the squeeze on UK households is set to continue.

The Ernst & Young Item Club said real disposable incomes were on track to fall for a second year running, repeating a trend last seen in the mid-Seventies.

The figures follow a recent warning from the Bank of England governor Mervyn King, who said households were facing the longest squeeze in living standards since the 1920s.

The financial data firm Markit said the cost of living at the beginning of April had jumped at a "record rate" since its survey began in February 2009, while inflation expectations reached an all-time high and household debt increased.

The survey's respondents were also the most concerned about their job security for 26 months, with public sector workers "particularly worried". While the headline Markit Household Finance Index was marginally up to 35.5 in April from 35.2 the previous month, this was still significantly below the no-change level of 50.

As a result, Markit said the overall situation represented a "further steep deterioration in household finances". Alex Hamilton, an economist at Markit, said: "April's survey signalled a further sharp squeeze on already hard-pressed household finances, with respondents bracing themselves for continued pressure over the coming year."

About 36 per cent of households reported deterioration in their current finances this month , with only 7 per cent noting an improvement.

In a similar vein to its other recent surveys, public sector workers were "more downbeat about their finances" than their private sector counterparts.

In total, 27 per cent of respondents said they felt more uncertain about their employment prospects than one month ago. This compared with only 6 per cent who felt more secure. The combination of declining incomes and rises in the cost of living, spurred on by record petrol prices, resulted in consumers having substantially less cash to spend. The lowest income group, earning less than £15,000 a year, suffered the largest decline, reinforcing the view that they are bearing a disproportionate impact of the Government's austerity drive.

Mr Hamilton said: "UK households continue to see their purchasing power being eroded by the rising cost of everyday living, which rose at a record pace in April. Meanwhile, worries about job security intensified, with employees indicating their greatest concerns in 26 months."

Underscoring the gloom, new figures from the research firm Credit Confidential show that Britons were finding it increasingly harder to borrow. Its credit index, designed to highlight the level of credit accessed by UK households, plummeted by 10.4 per cent to 19 in the first quarter of 2011 – way below the long-term average of 50.