By Daniel Hunter

At 38.4 in September, the headline Markit Household Finance Index (HFI) was only slightly lower than the 20-month high posted during August (38.9). As a result, the latest reading was one of the highest seen in the past two years, albeit still below the 50.0 mark that separates improving from deteriorating household finances.

Around 31% of respondents noted that their finances worsened in September, while 7% reported an improvement.

The main negative development in September was a sharp increase in inflation perceptions, with the month-on-month acceleration the greatest since January 2011 (which followed a VAT rise). There was also a jump in inflation expectations, which reached their highest for four months.

On a less downbeat note, September data pointed to decreased pessimism about the financial outlook, alongside reduced squeezes on both household savings and cash available to spend. The index measuring households’ assessment of their year-ahead financial outlook increased to 44.3 in September, from 43.5 during August. Around 40% of households anticipate that their finances will deteriorate over the next 12 months, compared to 29% that expect an improvement.

Therefore, the overall reading indicated the least pessimistic financial outlook since March 2010. Sentiment was strongest among those employed in IT & Telecoms, followed by Finance / Business Services, while Education/Health/Social workers were the most downbeat of the main job categories.

September’s index reading for people working in the private sector (47.1) was less downbeat than the equivalent for public sector workers (39.7), thereby continuing the trend seen for almost two- and-a-half years.

“September’s survey suggests that the gradual easing of pressure on real incomes so far in 2012 continues to support household finances," Tim Moore, Senior Economist at Markit and author of the report said.

"The headline HFI reading compares favourably with the trend seen over the past two years and, perhaps most encouragingly, the squeeze on savings was the least marked over this period.

“A summer of relative calm on the household finance front has brought with it an improvement in expectations for the year-ahead. The recent stabilisation in overall job insecurity also contributed to a less downbeat assessment, with households now the least pessimistic about their future finances since early 2010.

“However, households appear to have become more concerned about the inflation outlook, with cost of living expectations rising sharply since August. Higher fuel costs are likely to have sparked the uptick in inflation expectations, possibly alongside industry warnings of greater food prices ahead. Around three-quarters of households noted an increase in their living costs during September, and the monthly jump in inflation perceptions was the largest since the January 2011 VAT rise.”

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