Families are £140 a month worse off than five years ago

Families are at least 15 per cent worse off than five years ago because of soaring living costs.

The amount being spent on essentials has risen by £137 a month more than the amount coming into the average household since 2003/04.

Net monthly income for an average family with two children  under 16 increased by £507 to £2,859, according to accountants Ernst & Young.

However, essential outgoings have gone up by £644 a month to £2,086.

Essentials were counted as the mortgage, the cost of running a car, gas, electricity, water, insurance, public transport, council tax and telephone use.

Debt repayments and pension contributions were also included. But food was not, which means the figures underplay the full extent of the squeeze on household finances.

The Daily Mail's Cost of Living Index has identified an 19.8 per cent increase in the price of shopping essentials over the past year alone.

The study by Ernst & Young looked at how much households have left over each month after bills have been covered, so-called discretionary income.

It says this figure has fallen from an average of £910 in 2003/4 to £773 today.

This must cover groceries, clothes and the luxuries in life such as holidays, restaurant meals and days out. Director of retail at Ernst & Young, Jason Gordon, said: 'UK consumer spending power has fallen dramatically in the face of massive hikes in the cost of living.

'Fixed household costs account for 53 per cent of a typical household's gross income compared with 45 per cent in 2003/04.'

The increasing cost of essentials is a particularly heavy blow to those on fixed incomes, such as pensioners. 

The basic state pension went up by just £3.40 a week – 3.9 per cent – in April to stand at £90.70.

The report found that over the last five years: Average mortgage payments, based on a 25-year repayment loan at the standard variable rate, are up by 78 per cent to just under £735 a month.

The staggering increase is down to a combination of higher interest rates and bigger loans.

The monthly cost of petrol is up by 29.4 per cent to £193.61, based on a medium-sized car travelling 15,000 miles a year.

Average monthly energy bills – gas and electricity combined – have risen by 110 per cent to £95.80 a month.

Mr Gordon said: 'If we go one step further and factor in food price inflation, it's clear that household budgets are under enormous strain.'

The figures will sound alarm bells for the Government and the Bank of England amid warnings that the country is in danger of slipping into recession.

Mr Gordon said: 'Worryingly, the worst could be yet to come. If, as predicted, utility prices rise by as much as 40 per cent later this year and interest rates are increased to control inflation, we face even bleaker times.

'The significant decline in discretionary income has hit retailers hard as consumers are no longer in a position to spend as freely as they have done in the recent past.'