By Marcus Leach

According to the Markit Household Finance Index (HFI) UK families' household finances were marginally worse in October than in the previous month.

At 35.0 in October, little-changed from 35.1 in September, the headline HFI remained well below the 50.0 no change mark that separates growth from contraction.

The latest reading pointed to a steep deterioration in household finances and a much faster rate of contraction than those seen throughout 2010 and the second half of 2009.

Close to 37% of respondents signalled worsening household finances in October, while just 7% reported an improvement. Worsening household finances were again seen across all income groups and regions monitored by the survey.

People with a mortgage saw a particularly tight squeeze on their finances, and the rate of deterioration was little-changed from the survey-records seen in the previous two months (41% of respondents in this category reported worse household finances in October).

October data pointed to a steep reversal in households’ outlook for their finances in 12 months’ time. After climbing steadily over the summer, the index measuring sentiment about future household finances fell sharply to its lowest for six months.

At 34.5, down from 42.2 in August, the month-on-month drop in the index was the largest since the survey began in February 2009. More than half of all respondents (54%) expect their finances to worsen, while only 22% anticipate an improvement in the year ahead.

Public sector workers are especially downbeat about their future household finances (63% expect a deterioration and only 17% an improvement). At 27.4, down from 37.9 in September, the resulting index was the lowest in the survey history and well below the national average.

By home ownership type, people with a mortgage also reported a survey-record level of pessimism about the outlook for their finances. Almost three times as many respondents in this category (59%) anticipate a deterioration as those that forecast an improvement (20%).

Households reported a modest rise in spending during October (28% noted an increase, against 25% that indicated a reduction). However, cash available to spend continued to fall sharply (43% reported a decline), reflecting higher prices and lower incomes in October.

Income from employment dropped for the thirteenth successive month. Moreover, public sector workers reported the sharpest reduction in their pay since March. Households also reported a subdued outlook for their income over the coming year. Around 54% of respondents anticipate no change in their income, against 31% that expect an improvement and 15% that predict a decline.

Expectations for future income are weakest in the public sector, where just 27% predict a rise versus 21% anticipating a fall. In the private sector, nearly 33% forecast an increase against 13% that expect a decline.

Job security meanwhile declined at the fastest pace for three months, led by an acceleration in the public sector. Almost five times as many public sector employees reported a drop in job security (29%) as those that noted an improvement (6%).

Squeezed incomes and worries about job security contributed to another marked reduction in households’ appetite for major purchases (49% noted a fall in October, and just 7% an increase). By home status, mortgage holders were especially downbeat, with the latest fall in their willingness to make major purchases close to the survey-record seen after the VAT rise in January 2011.

Household savings remained under pressure in October, and fell at a sharper pace than in September. Respondents working in the public sector saw the fastest fall in their savings since the survey began in early 2009 (32% noted a decline in October and only 6% reported an increase).

Higher debt levels were recorded for the seventh consecutive month in October, which is the longest continuous period in the survey’s history. Only those in the highest income group (over £58,000 per year) saw an overall decline in debt. By employment category, people in the public sector reported rising debt, while private sector workers indicated a near- stabilisation in October.

Around three times as many respondents (16%) reported a rise in their need for unsecured credit as those that saw a reduction (5%). By income group, the sharpest rise in demand for unsecured borrowing was in the middle income band (£23,000 - £34,500). Moreover, the rate of increase in this category was the fastest since January 2010.

Current inflation perceptions remained at an elevated level in October. Around 78% of households reported an increase in their cost of living since the previous month, while only 4% noted a fall. However, the resulting index reading dropped to 87.3, from 90.0 in September, to indicate the lowest inflation perceptions since December 2010.

Expectations about the rate of inflation in 12 months’ time also eased in October. After rising in August and September, the latest reading pointed to the lowest inflation expectations for a year. However, at 92.4 in October, the index was still comfortably above the average since the start of the survey in early 2009 (88.4). Inflation expectations remained especially high among respondents in the oldest age category (55+).

“Household finances were once again gripped in a vice of subdued real incomes and heightened job insecurity in October," Tim Moore, Senior Economist at Markit said.

"Weak labour market conditions, combined with elevated inflationary pressures, have made rising debt and falling willingness-to-spend recurring themes this year. October was no exception, with these unwelcome trends especially prevalent among public sector employees and the lowest income groups.

“Public sector workers also noted the bleakest outlook for their household finances since the survey began in early 2009, with almost two-thirds expecting a deterioration over the year ahead.

“However, concerns about a stalling recovery in the wider economy meant that heightened pessimism was not just confined to public sector workers. The overall balance of households expecting their finances to deteriorate in the year ahead was the largest for six months, which more than reversed the modest improvements seen in the summer.

“Households also expect a continued erosion of their real incomes next year, despite inflation expectations falling back slightly in October. Around 88% of households anticipate a rise in their cost of living next year, while only 31% of respondents forecast increased income over this period.”

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