The effect of rising inflation is beginning to have an effect on consumers, with UK households feeling a larger-than-expected squeeze on finances.
According to the latest figures from Markit’s Financial Index, UK consumers are experiencing the second-largest budgetary squeeze in nearly two and a half years.
Greater inflationary pressures offset a sustained improvement in labour market conditions, with living costs rising at fastest pace since April 2013.
The Household Finance Index, which is designed to anticipate changing consumer behaviour, dropped to 42.5 in February. This is down from a figure of 43.6 in January, with any reading below 50 signalling a deterioration in financial well-being.
However Tim Moore, senior economist at IHS Markit, said the news wasn’t all negative:
“There was positive news from the survey’s measure of workplace activity, which signalled the strongest growth momentum since December 2015. Busier workplaces meant that worries about job security continued to recede from the lows seen after the EU referendum.
“People working in the private sector are the least downbeat about their financial outlook since early-2016, suggesting that the improving economic backdrop and rising income levels have helped to offset inflation concerns. By contrast, public sector staff and households on fixed incomes are more concerned about their financial outlook than at almost any time since mid-2014.”
The figure comes just days after the Bank of England warned that inflation may rise above its 2 percent target in the next year, as pressure from the UK’s decision to Leave the European Union begins to raise the price of imports. The Bank anticipated that inflation would be at around 2.7 percent within one year.
Data released on Wednesday saw fuel prices drive the inflation figure upwards, hitting 1.8 percent last month. This was a sharper than expected increase on December’s figure of 1.6 percent.