By Marcus Leach

UK households started 2012 with a much less downbeat assessment of their household finances than was the case at the end of 2011, according to new data.

At 36.4, up from 34.3 in December, the headline Markit Household Finance Index (HFI) was the highest for 13 months. The index remained below the neutral 50.0 value, but was comfortably above the near-record low seen at the end of 2011.

Around 33% of households indicated that their finances worsened over the month, compared to 6% that saw an improvement.

Slower deteriorations in household finances were seen across all income groups during January. Although the lowest income category (less than £15,000 per year) still reported the tightest squeeze on their household finances, the rate of deterioration was much slower than the near-three year low seen in December.

The latest survey suggested that lower inflation perceptions were the main positive influence on household finances at the start of 2012. Current inflation perceptions and the year-ahead outlook were both the lowest for 15 months.

This partially offset a marked drop in income from employment in January, which fell at the fastest pace in the three-year survey history. Savings meanwhile declined at the slowest rate for six months and households reported the weakest squeeze on cash available to spend since June 2011.

January data also indicated that households are less downbeat about the prospects for their finances in 12 months’ time. Around 42% of respondents expect that their finances will worsen, while close to 26% anticipate an improvement. The resulting index reading was 42.0, up sharply from 37.1 in December and the highest level for four months.

The index was also the second-lowest since April 2010, signalling a much lesser degree of negative sentiment than has generally been the case over the past two years.

The highest income group (over £57 751 per year) were much less downbeat than the other categories monitored by the survey. That said, the lowest two income groups both reported their lowest degree of negative sentiment for two years.

By region, people in the South West were the least pessimistic, with the index also rising to its highest since October 2010. Households in Wales were the least confident about their future finances, followed by those in the East of England.

“The year has started with a few chinks of light for household finances, helped in no small part by a drop in inflationary pressures on the high street and recent news of energy price reductions," Tim Moore, Senior Economist at Markit said.

"This is an encouraging development given the pervading gloom towards the end of 2011.

“Those with the lowest incomes saw the biggest turnaround in their current finances, reflecting the recent alleviation of pressure on everyday costs of living. They are still the most downbeat about the next 12 months, but the degree of negative sentiment was the lowest for two years.

“However, worries about wider economic conditions mean that any windfall from lower inflation will provide only a limited boost to consumer demand. The latest survey points to subdued appetite for spending as households instead opted to stabilise their recent run of savings reductions.

“January’s survey-record drop in household incomes highlights that a step-change in financial pressures is likely to remain elusive for some time to come. Squeezed pay settlements also mean that households budgets will again have little room for manoeuvre if inflation unexpectedly takes an upward course later in the year.”

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