Households grow more pessimistic on finances

By Nikhil Kumar
Monday 24 January 2011 01:00

British households are growing increasingly pessimistic about the state of their finances, with higher food and fuel costs, coupled with a sluggish job market, depressing sentiment and driving inflation expectations to new highs, according to a survey published this morning.

The Markit Household Finance Index shows a sharp rise in the number of households expecting their finances to worsen over the coming year, with more than a third – 34 per cent – of those quizzed reporting a deterioration in their current finances in January. Only 6 per cent saw an improvement, depressing the overall index to 36.1, down from 39.9 in December. The reading was the lowest since April 2009.

Inflation expectations climbed to a new survey high as some 89 per cent of households said they expected average prices for good and services to rise over the year, while only 2 per cent foresaw a decline.

The figures come less than a week after official data showed that the annual rate of price increases, measured by the consumer price index, had climbed to 3.7 per cent in December.

Rising expectations will add pressure on the Bank of England to raise interest rates as the year progresses. In a sign that households may already be anticipating a rise, the Markit survey shows that mortgage holders are particularly downbeat.

Some 48 per cent of mortgage holders said they were negative about the outlook for their finances over the next 12 months, up from 39 per cent in December, possibly owing to their exposure to interest rate rises.

"The latest survey captures the essence of the Bank of England's policy dilemma," Markit's senior economist, Tim Moore, said. "Inflation expectation for the year ahead have risen, not surprisingly, but high unemployment and fiscal tightening are already dampening household demand and risk weakening economic growth."

On the plus side for the Bank, the survey pointed to weak pay pressures, as respondents reported a faster rate of decline in their incomes. "If the muted pay pressures suggested by the ... survey keep underlying inflation pressures in check then the Bank of England will feel more comfortable," Markit said.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

View comments