Consumers' faith in the spending situation also deteriorated during the month with Nationwide’s spending index dropping three points. The ‘present situation index’ remained unchanged during the month, struggling to recover from its all-time low of 16 points seen in July 2009.
In line with recent house price figures, consumers expressed a more guarded optimism towards the housing market in July. Consumers now expect the value of their home to increase by just 0.4% over the next six months - a decrease of three tenths of a percentage point from June's figure.
Martin Gahbauer, Nationwide's chief economist, said: "Consumers continued to show caution towards the strength of the economic recovery during July. The index has now seen three consecutive months of decline and this has largely been fuelled by uncertainty as to what the next six months hold.
“In particular, there appears to be a growing concern among consumers as to their level of disposable income in the months ahead. July will have been a time for many consumers to reassess their individual circumstances following the Chancellor's emergency Budget, and inflationary pressures such as rising food and fuel costs may now be leading to more negative sentiment among consumers as they start to feel the pinch on their spending power.
"Over the previous few months we have seen a general downward trend in confidence that could be linked to the general election and consumer perceptions surrounding the impact of post-election policy changes.
“Expectations for the future have been a key driver behind the fall in overall confidence, with a lack of confidence in the future economic and employment situation forcing the index down. Since reaching a historical high of 120 points in February, the Expectations Index has now recorded a total drop of 44 points in the past five months, bringing it well below the long run average of 92.1 for this measure.
"The number of consumers who believe their household income will be lower in six months' time has edged up since February, and in July reached its highest level since the index began in May 2004.
“This is perhaps largely a product of consumers taking stock of their personal situation following the emergency Budget, although fears over the state of the job market and economy as a whole are still playing a part as the UK continues on its sluggish path to recovery.
"The fall out from the emergency Budget, concerns over the direction of the housing market and concerns over the rate of inflation are still very real. However, the Bank of England's decision this month to hold base rate at 0.5% for the eighteenth month running will be welcome news for many consumers who will continue to benefit from the positive impact that low mortgage repayments are having on their disposable income.
“It remains unlikely that we will see an increase to base rate before the end of this year. Nonetheless, with inflation remaining above the government's 3% upper limit, it is possible that we could see base rate start to slowly increase over the course of 2011 as the Bank of England looks to head off the risks that high inflation can have to the recovery. Any increase in interest rates would represent an additional squeeze on disposable incomes."
