High inflation is putting British family budgets in a stranglehold, but employees report that salaries are slowing starting to catch up with the cost of living, financial experts said.
Rising inflation is here to stay, knocking 3% off UK growth in the last three years, according to the Ernst & Young Item Club. And house prices have soared to a new high, in further signs of confidence returning to the market, a property website reported today.
But a new survey also out on Monday suggested that families felt pressures on their budgets were becoming less fierce, with a renewed increase in people's take-home pay as well as a perception that the rise in living costs is easing, according to financial information company Markit, which compiled the research.
Some 9% of people surveyed said their finances improved in May, while almost 28% said that they worsened, the slowest deterioration in household finances since May 2010.
Households were also the least downbeat about their financial outlook for the next 12 months than they had been since September last year.
London and Yorkshire and the Humber were the least downbeat regions, while those living in the East Midlands were the most pessimistic.
Tim Moore, senior economist at Markit and author of the report, said: "May's survey is a clear indication that the gloom is lifting over household finances.
"Budgets were under the least pressure for three years and rising workplace activity added to hopes in some quarters that their household finances may at last enter a period of relative calm."
But food prices have risen by nearly 40% since 2007, while businesses and consumers have also had to endure the impact of rising oil and commodity prices, a weakening pound and hikes to VAT.
Item's senior economic adviser Carl Astorri said: "High inflation has had a corrosive impact on the UK economy over the last three years, eating into household spending power which has taken its toll on the high street."
While the UK economy is showing signs of recovery, the Bank of England warned last week that inflation is not expected to fall below its 2% target until late 2015. New figures tomorrow will show inflation stood at around 2.7% in April.
Despite the impact on household budgets, Item said the Bank was right to stick to its guns by allowing inflation to overshoot and keeping interest rates at an all-time low of 0.5%.
Astorri said the alternative scenario would have seen interest rates rise by 3.5% in 2011, choking off the recovery even earlier and adding an additional 625,000 to the dole queue.
The report warned that even once temporary factors, such as a rise in tuition fees, have fed through the system, underlying inflationary pressures will have started to build again.
As the UK economic recovery continues to strengthen, workers will have greater bargaining power to push for wage increases while businesses will be in a better position to grow their profit margins with price hikes.
Rising import prices from emerging markets are also set to continue, driven by increasing labour costs as their economies mature.
The squeeze on household budgets was highlighted last week in official figures showing wage growth of just 0.4% in the year to March, well below the level of consumer price inflation at 2.8%.
But, in what is being viewed as a sign of confidence returning to the market, average house prices rose 2.1% to £249,841 this month, with new record prices set in London, the South East and East Anglia, according to Rightmove. London asking prices surged past the half a million pound milestone for the first time this month, standing at £509,870 typically.
Another property website, Zoopla, reported last week that just three in 10 house sellers whose home is currently on the market have dropped their asking prices, marking the lowest proportion recorded in three years.
The number of mortgages on the market has increased sharply and lenders have slashed their rates since a government scheme called Funding for Lending was introduced last August.