Household optimism hits 12-month high

IHS Markit UK has published its latest Household Finance Index which has shown that optimism in households has risen to a 12-month high in January. Whilst living costs continue to rise at a historically weak rate the report has found a deteriorating appetite for major purchases

The Household Finance Index (HFI) – which measures households’ overall perceptions of financial wellbeing – increased to 44.6 in January, from 43.2 in December, its highest mark in 12 months and indicative of an easing of pressure on UK household finances. In contrast, the index measuring future financial wellbeing expectations moved in the opposite direction, dipping back into mild negative territory in January following December’s renewed bout of optimism. Workplace activity, income and job security Other positives emerged from the latest survey, with workplace activity and incomes from employment both continuing to grow in January.

Easing pressure on current finances came in tandem with softer living cost inflation in January. According to latest survey data, UK households reported the joint-slowest increase in expenses since October 2016. A similar trend was seen regarding inflation expectations, which weakened in January to their lowest for over a year.

Meanwhile, almost one-in-four UK households expect Bank of England to cut rates as their next policy move. When polled on their expectations for the next change in Bank of England interest rate policy, there was some evidence of UK households shifting their views in January. According to the latest survey data, close to one-in-four (23%) predict the next interest rate change will be a decrease. This was up from 19% in December and the highest since last October. Meanwhile, the proportion of panelists anticipating an interest rate increase fell across all but one of the time horizons. The exception was for those foreseeing the next interest rate change being an increase after the next two years, where the percentage increased fractionally to 10%.

Joe Hayes, Economist at IHS Markit, which compiles the survey, said  “Latest survey data certainly show some post-election bounce for UK households, with the headline index up to a one-year high and house price expectations at their strongest since October 2018. That said, cooling inflation was most likely the real driving force, propping up real earnings and disposable incomes. “A rising proportion of UK households showed that they are in tune with the downbeat message from several monetary policymakers in the last couple of weeks, with almost onein-four now expecting the Bank of England to cut interest rates as their next move.”

“It therefore seems the case that, while falling living cost pressures are stimulating purchasing power, UK households are aware that weak economic conditions have led to an increased likelihood of lower interest rates. How this will impact consumer spending behaviour will be crucial to the UK’s growth prospects.”