A new survey that analyses the current state and outlook for UK household finances says that the situation has improved and the squeeze is the lowest for two years.
Markit says that stable employment levels and a reduction in debt has helped ease the pressure on household finances in the UK.
Markit’s Household Finance Index for October says that around four times as many respondents, 29 per cent, reported that there financial situation had got worse in the month, compared to seven per cent who said there had been an improvement.
This puts the index at its highest point since 2010 with a less marked squeeze on finances seen across various job sectors with manufacturing the only area posting a notable deterioration.
Markit says that income from employment stabilised in October and was helped by the increase in the minimum wage. Employment income deteriorated at the slowest rate for 25 months.
This, in turn, helped consumer spending which meant that in October cash available to spend dropped at the slowest rate for 22 months. Consumers appetitte for big purchases rose to the highest level for 22 months.
Markit reports that debt levels saw the biggest monthly drop in more than two years and onlt the second monthly drop in the last 18 months.
The figures are likely to be reinforced this week by the news that the UK has emerged from its double-dip recession. The first estimate of third quarter GDP is likely to show growth in the economy when official data is published on Thursday by the Office for National Statistics (ONS).
A separate survey by Deloitte shows that its Consumer Tracker puts consumer sentiment at its highest level for 12 months and should result in an improvement in consumer activity. However, concerns over the increased cost of fuel, food and energy means that the optimism could be shortlived.
The figures mean that economists hope to see a revival in spending over the next 12 months after two years where the public have had to cope with high inflation and concerns over job security and low wage increases. Overall, UK households have also been focusing on paying down debt in the last two years.
However, Markit says the outlook is far from certain because of the likely increase in inflation expected due to increased fuel and food costs and higher utility bills.
Inflation peaked at 5.2 per cent in September 2011 and has been falling overall since then and the consumer prices index (CPI) measure of inflation is now at 2.2 per cent, within touching distance of the Bank of England’s two per cent target.
However, analysts expect inflation to increase over the next six months. Although the third quarter GDP figures are likely to wipe out much of the 1.1 per cent contraction seen in the economy over the last nine months, underlying growth is still seen as weak.
The longer term outlook is still pessimistic. Markit reports that the index for future finances over the next 12 months fell from 44.3 in September to 37.4 in October, its lowest point so far in 2012. 45 per cent of respondents expect their finances to get worse in the next 12 months compared to 20 per cent who expect to see an improvement.
The report said that a balance of 25 per cent of respondents expect their finances to get worse over the next 12 months, compared to just 11 per cent in September.
Howard Archer, Chief UK & European Economist at IHS Global Insight said: “The Markit survey is a clear warning that a significant, sustained improvement in consumer spending is far from guaranteed.
Tim Moore, senior economist at Markit, said: “Households indicated sharp downward revisions to their financial outlook in October, bringing a rather abrupt end to the improvements seen throughout the summer.
"While pressures on current finances were reported to have moderated again, helped by stabilising incomes and lower debt, the steep reversal in future sentiment is a clear signal that households are likely to keep a tight rein on spending in the months ahead.
"Weak economic sentiment and worries about rising living costs are again the main factors bearing down on the outlook for households' financial well-being."
Meanwhile, Deloitte said that concerns about the level of disposable income fell by ten per cent over the last year and the percentage of households concerned about debt levels fell from 16 per cent to ten per cent.
Ian Stewart, chief economist at Deloitte, said: “The Consumer Tracker points to a reduction in the stress on the household, with consumers more positive about their income and employment, and working hard to balance the books by reducing their levels of debt.
"This brighter outlook is tempered with caution as there is no evidence yet of a significant loosening of the purse strings.
"The real test is when we will see a pronounced shift towards greater discretionary spending, especially on big ticket items such as holidays and white goods, and consumers trading up. This will be key to whether we see continued growth in consumer spending in 2013."