UK households are the most downbeat about their finances since 2013, as families start to feel the pinch from rising inflation and weak wage growth, according to a new survey.
This suggests that consumer spending, until now the main driver of UK economic growth, will weaken in coming months.
An index measuring household expectations for finances in 12 months’ time dropped sharply to 45.3 in March, from 48.1 in February, according to economic consultancy IHS Markit. This signals the greatest degree of pessimism since November 2013.
People living in the east Midlands were the most downbeat about their financial prospects, followed by those in the north-east and London.
Inflation has picked up sharply in recent months as the weak pound has pushed up the cost of imported goods. Data released on Tuesday showed that inflation hit an annual rate of 2.3% in February, with food and motor fuel becoming more expensive. This contrasts with near-zero inflation a year ago. Coupled with slowing wage growth, this leaves households worse off.
Tim Moore, a senior economist at IHS Markit, said: “UK households reported greater pressure on their financial well-being in March, as rising inflation has started to erode incomes and reduce cash available to spend. On average in the first quarter of 2017 survey respondents have reported the sharpest increase in their everyday living costs for three-and-a-half years.
“A combination of rising inflation and subdued pay trends has forced households to recalibrate their expectations for the year ahead. After holding steady last summer, UK consumers are now more downbeat about their financial outlook than at any time since late 2013.”
Higher inflation has increased the chances of an interest rate rise, and more than half of households (58%) are expecting the Bank of England to raise interest rates in the next 12 months.
The findings came as the latest report from Bank of England agents, who toured the country between late November and late February, showed that retail sales growth had eased and was expected to slow further in the year ahead. The Bank blamed the sharp fall in sterling feeding through to higher prices, reducing households’ purchasing power.
At the same time, the weaker pound and the stronger world economy have boosted export volumes and business investment intentions have picked up, pointing to modest growth in company spending this year, the Bank’s report said.