In a somewhat bleak outlook for British households, the Household Finance Index dropped to its lowest level for 20 months in January, meaning that households are the most pessimistic about their finances than they have been for nearly two years.

Carried out every month and using responses from 2,000 people, the Household Finance Index (HFI) is a survey conducted jointly by YouGov and research group Markit Economics and aims to accurately predict changes in consumer behaviour.

The results for January reveal that the HFI has dropped a significant amount from 39.9 points in December to 36.1 points this month. The figures also represent a 20-month low for the Index, which last dropped to this month’s low in April 2009.

The survey also found that due to the rising cost of living – the recent VAT rise, from 17.5% to 20%, being a key example – and falling income levels have led households to amass more personal debt problems. This in turn has resulted in less major purchases being made, as families worry about saving.

Over a third of households surveyed said that they had experienced a deterioration in their finances, whilst just 6 per cent reported an improvement. Around nine out of ten households said that they expected the average prices of everyday services and goods to rise throughout 2011, with just 2 per cent optimistically predicting a decline in prices.

Tim Moore, senior economist at Markit, commented on the results of the survey, saying:

“Household finances deteriorated further from the already downbeat picture taken at the end of last year. The recent VAT increase, higher inflation and squeezed incomes mean that households are once again running just to stand still. Little respite appears around the corner.”

“Mortgages” and “loans” amongst most common search terms last year