Household finances wane as inflation worries rise

UK household finances slumped to a five-month low in October, with rising inflation seen as the most likely cause.

IHS Markit’s household finance index, which is designed to anticipate changing consumer behaviour using data from market research company Ipsos MORI, fell to 43.8 in October from 44.7 in the previous month.

This was said to be due to financial pressures rising to their highest levels since the EU referendum, with data showing inflation perceptions rising to a 22-month high being a key factor behind the fall in HFI as well as stagnating incomes and rising job insecurities.

“For the first time since the vote to leave the EU, UK households saw a noticeable downturn in current finances during October," said IHS Markit economist Philip Leake.

"The HFI had held broadly steady throughout the third quarter, but the latest reading was the lowest in five months.”

He said inflation "appeared to be a key factor" behind the financial strain, with ONS figures released on Tuesday showing the largest annual rise in consumer prices for almost two years, and survey data suggesting that trend is likely to continue.

Expectations for household finances in a year’s time fell to a three month low of 48.3 from 49.4 in September. It was the seventh successive reading below the 50 no-change level.

On a positive note, workplace activity increased for the third consecutive month after falling in the immediate aftermath of the Brexit vote in July, with the highest growth in finance and business services followed by education, health and social services.

“Policymakers face a potential balancing act – price pressures stemming from the weakness of sterling against an uncertain growth outlook with Brexit negotiations set to begin early next year. Some households are therefore expecting a further rate cut to stimulate the economy, while others see tighter monetary policy within a year,” said Leake.