British households are feeling more confident than they have at any time over the past six years, helped by falling unemployment and a plunge in inflation.
The monthly Markit household finance survey’s measure of financial well-being rose in March and expectations for the next 12 months have also increased.
Markit said the squeeze on UK household finances remained mild in March, marking the least downbeat quarter in more than six years of data collection.
Chris Williamson, chief economist at Markit, said: “An upturn in household sentiment about their future finances in March is a welcome sign, but also highlights a vulnerability of the UK economy.
“The upturn in consumer well-being has been driven by the twin factors of higher workplace activity and lower inflation. The former has helped via greater job security and modest income growth, while the latter has meant incomes go further in terms of spending power.”
Markit said that in recent months low inflation has been key to the improvement in household sentiment while workplace activity has had a waning impact.
“This suggests that the recent upturn in consumer spending, which has been a key driver of the economy, has become increasingly dependent upon inflation remaining low,” said Mr Williamson.
“Any increase in inflation therefore threatens to derail the wider economic upturn.”
The average reading of the household finance index in the first three months of 2015 was the highest on record, which could boost David Cameron’s chances of re-election in the general election on May 7.
“UK households’ optimism about their finances picked up in March to paint one of the brightest pictures seen since the financial crisis,” said Mr Williamson.
Britain’s main measure of inflation fell to 0.3 per cent in January, its lowest level since records began in 1989.
The survey showed that rather than deferring purchases in the hope that prices will fall further in coming months, consumers have been taking advantage of lower prices.
The survey also showed that sentiment is strongest among high-earners.
“The latest increase in optimism was directly linked to incomes, with the highest earners the most upbeat about their future finances,” said Mr Williamson.
“In contrast, future finances are expected to deteriorate among those earning less than £23,000 per annum, and especially sharply for those with incomes of less than £15,000.”
Markit saw a slight rise in the number of people expecting an interest rate rise before September.