Households Report Least Pessimistic Financial Outlook for 2½ Years, but Inflation Perceptions Pick Up in September

Michelle Remo, “Big 4″ observer
September 24, 2012 /

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.

Future finances

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 twoand-a-half years.

Regional divergences continued in September, with London again the least pessimistic (47.1) and Wales the most downbeat (35.3). Improved financial expectations were likely supported by a lesser squeeze on savings and cash availability in September.

Savings declined at the slowest rate for two years, while the latest drop in cash available to spend was the least marked since the end of 2010. In line with the trend for the financial outlook, private sector workers saw a lesser drop in both their savings and cash available to spend than those in the public sector.

Job security, income and debt

Households’ income from employment continued to decline in September, but the rate of contraction was only modest. Around 12% noted a reduction, compared to 8% that registered an increase. Debt levels meanwhile rose fractionally during the latest survey period, following a brief stagnation in August. The overall rise in debt was driven by renters in September, as those with a mortgage or owning their home outright saw further reductions.

The index measuring job security dipped slightly from 44.9 to 43.9 in September, but this was broadly in line with the average for 2012 to date and still higher than at any time in 2011. IT & Telecoms and Finance/Business Services staff were the least downbeat about their job security.

Construction and Education/Health/Social workers are the most downbeat about job security. Overall, private sector employees were only slightly less downbeat about job security than public sector staff in September.

Inflation perceptions

At 85.8 in September, up from 83.3 in August, the index measuring households’ current inflation perceptions jumped to its highest since May. Around three-quarters of the survey respondents noted that their cost of living had increased since the previous month.

Moreover, the month-on-month rise in the index was the greatest since January 2011. Inflation perceptions were broadly similar across the five income groups monitored during September, with the strongest reading for those in the middle band (£23 000 – £34 500).

September data also highlighted a marked increase in households’ inflation expectations, with the latest
reading the strongest since May. The month-onmonth rise in year-ahead inflation expectations was the fastest since November 2010.

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