Alliance Trust’s measure of consumer financial wellbeing shows a worrying fall in the fourth quarter of 2007 as pressure mounts from rising prices, increased debt and slowing house price growth.

Consumers are facing increasingly extreme pressure on their day-to-day costs with rising food and fuel prices and a higher burden of debt. The economic research team’s Financial Reality Index, which analyses a range of key factors affecting consumers’ underlying financial wellbeing, saw its biggest fall in 18 months as a build up of pressures put households under greater strain.

The index tumbled 10%, from 88.6% in the previous quarter to 79.7% in the fourth quarter (October-December 2007), one of the lowest levels in the study’s 11-year history.

But while consumer spending continued to defy this underlying financial reality, Alliance Trust expects households to react to their worsening economic situation during the next 12 months by reining in their spending.

On this index, a measure of 100 indicates consumers’ overall financial situation is around average for the long term, with a below-100 reading meaning people are facing worse-than-average financial pressures.

Shona Dobbie, head of Alliance Trust’s research centre, said: “Our latest financial reality report highlights how acute the consumer’s predicament has become. Our measure of consumer wellbeing shows a worsening picture not only for household budgets, but for consumers’ net wealth and the economy as well.

“This is the first time since the end of 2004 that all these elements that make up consumer wellbeing have fallen at the same time. We are seeing particular pressure on budgets with higher food and fuel prices and heavy levels of debt and mortgage payments.

“Given the level of strain on household budgets, we expect consumer spending to slow further over the next year, even though current spending levels show people have yet to take full stock of their financial reality.

“Our study shows that consumers have apparently spent beyond their means for the last two years, resulting in ever higher levels of debt. This trend is set to end, however, since there are additional pressures on households’ financial wellbeing because of a downturn in those factors that affect their net wealth such as the poorest quarter on the stock market in four years, rising debt levels and the cooling of house price growth.”