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Consumers less gloomy as inflation falls

Monthly snapshot from Markit showed lower demand for unsecured credit and more appetite for major purchases this month but optimism is still at very low levels

Signs that the gloom over Britain’s family finances is lifting emerged on Monday as lower inflation contributed to the least downbeat outlook in nearly two years.

Even so, the pressure on household finances has persisted, according to a closely watched index that remains well below the level at which consumers report an optimistic outlook for the year ahead.

According to a monthly snapshot from the data provider Markit, household debt stabilised in February while the number of people reporting rising demand for unsecured credit, such as credit cards, fell to the lowest level for 11 months. Households’ appetite for major purchases hit levels not seen since the VAT hike in January 2011, while households are the least pessimistic about their financial prospects for the year ahead since April 2010.

But while Markit’s household finance index rose to 38.7 this month from 36.4 in January – above the average of 37.5 – it is still far below the neutral 50 threshold.

The survey is released ahead of the latest official estimate for GDP in the fourth quarter – which showed a 0.2% contraction in the first estimate – later this week. It comes after the surprisingly strong 0.9% rise in spending on the high street and online in January, seen in a survey published on Friday.

It also comes a month before George Osborne’s budget, scheduled for 21 March, and as the chancellor’s team in the Treasury remain locked in talks with banks about plans for £20bn of “credit easing”. This would take the form of a national loan guarantee scheme (NLGS) intended to support small businesses by helping banks borrow money more cheaply, which can in turn be passed on to businesses.

An announcement is slated for 15 March, although it is not yet clear whether banks such as HSBC, which can already raise funds fairly cheaply, would join the NLGS. The Treasury insisted “good progress” was being made on how it would work.

UK inflation fell sharply to 3.6% in January from 4.2% in December, although most of this was due to the impact of last year’s VAT rise on the annual rate. Petrol prices rose less sharply than a year ago and the cost of clothes, furniture and household goods came down.

This is likely to continue. James Knightley, a senior economist at ING, said: “Plunging inflation through 2012 will ease the burden on households and could facilitate higher saving, lower borrowing and rising spending later this year.”

People’s biggest worries are about job security and pay, both still falling at similar rates to those seen over the past three years, according to Markit.

Tim Moore, an economist at Markit, said: “Lower inflationary pressures are of course no silver bullet for household finances, and the strain on budgets from weak job market conditions shows little sign of abating.

“Income from employment dropped again in February, while job insecurities across the private sector were the most acute since mid-2009.”

At the same time, the survey showed the slowest deterioration in current household finances since December 2010. About 30% of households were pessimistic about their finances, compared with 8% that reported an improvement.

A survey by Lloyds showed that the fall in inflation had not fed through to households last month. Patrick Foley, Lloyds TSB’s chief economist, said: “The competing effects of falling inflation against a weakening in the employment and income situation are set to be the dominant theme of the first half of 2012. The spending power report shows that in January weakening income growth has outweighed the recent fall in inflation, ensuring consumers are still being squeezed.”

A separate survey by the savings bank ING Direct showed a 4.9% rise in cash savings between October and December, following three quarters of declines. This took the average savings up by £73 to £1,574. Most of this saving was made in October and November, leaving consumers with a buffer that they could tap into for Christmas spending and making them less reliant on plastic. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds