One in three Scots now staring into cost-of-living black hole

Scottish households are increasingly worried about the impact of inflation on their finances as incomes are ravaged by higher prices.

Almost one in three Scots expect their spending power to weaken further over the next six months, with fears growing over household bills at a time when income growth is stalling, according to a report published by Lloyds TSB yesterday.

The proportion of people who believe their spending power will decline over the coming months almost doubled in Scotland in July to 32 per cent, the biggest rise in the UK, the Lloyds survey found.

The study, carried out before the markets were hit by fresh waves of panic at the end of last week, described consumer concerns over the financial situation as "extremely high", with confidence falling as people struggle to cover their outgoings.

The number of Britons dipping into their savings to get through the month rose at the fastest rate this year in July. One in ten respondents said they didn't have enough money to meet their monthly costs, rising to 14 per cent of those aged between 35 and 44.

Mike Regnier, director of current accounts for Lloyds TSB, said: "With an increasing amount of negative news flow around price rises in the last month, it is not surprising that this has fed through to consumer confidence. However, it is also clear that consumers are feeling the squeeze on their spending power.

"More consumers didn't have enough to make ends meet, and as a result they are having to dip into their savings to get through the month."

Consumer expectations over the outlook for the coming months also deteriorated in July. Nine in ten people are worried about inflation, with rising energy prices the chief concern. The same proportion think the UK's current financial situation is "not good".

Patrick Foley, chief economist at Lloyds TSB, warned that the electricity and gas price rises announced in recent weeks will add to the pressure on essential spending. "Without offsetting reductions in inflation elsewhere or further improvements in employment, it is unlikely that spending power will improve significantly in the near term," he said.

The Lloyds research is supported by a Brewin Dolphin survey which found that almost nine in ten Scottish households fear the impact of higher inflation over the next year as disposable incomes fail to keep pace with rising prices.

The vast majority of Scots believe the cost of living has increased sharply over the past two years, and 86 per cent expect it to continue doing so over the next 12 months.

Seven in ten Scots are worried that their incomes will be outstripped by inflation over the coming year. And while low mortgage rates have helped some homeowners stay on top of their finances, just 10 per cent of Scottish households believe they have benefited from a fall in the cost of borrowing. Six out of ten said their savings and investments are suffering in the current economic environment, and less than 30 per cent have confidence in the Bank of England's strategy for combating inflation.

Mike Lenhoff, chief strategist at Brewin Dolphin, said: 'Inflation is an evil whichever way you look at it and wherever you look. It is squeezing real incomes, and savers are not being rewarded by negative interest rates.

"In the developed economies the loss of recovery momentum from rising inflation has left equity markets with nowhere to go. There's been no inflation hedge."