The index dropped to 42.2, from 42.9 in January, signalling the greatest squeeze on household finances since July 2017. 

Inflation was the biggest culprit, with household cash available to spend falling at its fastest pace for ten months. At the same time, income from employment increased at the slowest rate since last November, which contributed to another marked reduction in households’ appetite for major purchases.

Households are also looking ahead to potential rate rises – 60% of UK households anticipate a Bank of England rate rise within the next six months. This figure was up sharply from 45% in January, suggesting that consumers are increasingly braced for higher borrowing costs.

While the survey showed job security and employment income increasing, it was not enough to compensate from the inflationary pressures elsewhere. February data indicated that households’ living costs increased at the sharpest pace for 12 months.

Tim Moore, associate director at IHS Markit, said: “The latest survey adds to evidence that UK households have seen an erosion of their financial wellbeing so far this year, with stubbornly high inflation the main factor placing pressure on consumer budgets. In response to squeezed incomes and concerns about the financial outlook, households appear to have reined in spending, particularly on big-ticket items.

“UK households are braced for higher borrowing costs ahead, with the majority now expecting a rate hike from the Bank of England over the coming six months. There has been a clear shift in interest rate expectations since the start of 2018, suggesting that households are closely in tune with the more hawkish mood among policymakers.”

Samantha Seaton, CEO of Moneyhub, added: “The latest fall in the Household Finance Index further underlines just how much pressure consumers are under after over a year of consistent price increases. Inflation remained at 3% in January and there seems to be no signs of price rises slowing down. As wages rise, we run a real risk of triggering a wage-price spiral. This could really hurt those on a modest income and pensioners on a fixed income.”