Family budgets are under greater pressure than they have been in three years, causing consumers to cut back on spending, according to two closely watched surveys.
Britons are becoming increasingly pessimistic about their finances because of higher inflation and fears of possible interest rate increases, IHS Markit found in its monthly household finance index.
The Bank of England’s agents report said that consumer spending was slowing because of rising inflation.
Households have been the main victims since the fall in sterling after last June’s Brexit vote. Inflation is outpacing wage growth for the first time since late 2014, causing people to dip into savings and to take on debt.
The Bank found that “pay awards remained clustered around 2 per cent to 2.5 per cent across the economy”, below the present 2.7 per cent inflation rate. However, there are plans for “modest” jobs growth. The findings come after recent official data, which showed retail sales in the first quarter of the year down by 1.4 per cent, the first fall in four years. Savings rates are also at record lows and consumer confidence has been tailing off.
Tim Moore, of IHS Markit, said: “Households experienced sharply rising living costs against a backdrop of subdued pay growth, which contributed to a sustained squeeze on financial wellbeing. Recent pressures on consumer finances have been the sharpest for almost three years. There are also signs that some households have responded by taking on extra borrowing.”
The Bank said: “Consumer spending growth had moderated in real terms, as spending power had been hit by higher prices, following the fall in sterling.” It also found that housing market activity had been “muted”.
Households are not particularly worried about job security but are concerned about rising living costs, the surveys found.
According to Markit, families suffered “one of the sharpest falls in cash available to spend for two and a half years in May” and that the trend since 2011 of fewer people taking on unsecured debt has reversed this year.
Inflation expectations are at their highest since early 2014 and more than half of households expect an interest rate rise within 12 months.
In August last year, only 28 per cent expected a rate rise within a year. Financial markets don’t expect the Bank to move until early 2019, however.
“Looking at the average reading in the three months to May, the decline in household finances was faster than seen at any time since autumn 2014,” IHS Markit said.