Households' disposable income fell for the first time in almost 30 years, according to official figures which overshadowed news that the economy shrank by less than previously thought.
Consumers' disposable income fell by 0.8% in the final quarter of 2010, the Office for National Statistics said, providing further evidence of the squeeze on consumer spending.
The first decline in spending power since 1981 came as wages failed to keep up with soaring inflation.
The ONS also revealed gross domestic product (GDP) fell 0.5% in the snow-hit final quarter of last year - a slight improvement on the 0.6% decline previously estimated.
The recovering manufacturing sector grew more than previously thought, the ONS said, while services and construction fell less than previously estimated.
The 0.5% reduction is still the biggest fall since the second quarter of 2009. The ONS said the reading would have been flat without the impact of December's Arctic weather conditions.
The ONS data showed the decline in household spending was worse than previous estimates in the fourth quarter - revised to a fall of 0.3% from a 0.1% drop.
Scott Corfe, an economist at the Centre for Economics and Business Research (CEBR), said the squeeze in consumer spending shows growth figures for the economy may be too optimistic despite being recently downgraded by the Office for Budget Responsibility.
He said: "The decline in real household disposable income seen in the final quarter of 2010 will almost certainly continue in the first quarter of 2011, as high consumer price inflation - now over double the Bank of England's target - erodes household spending power.
"Ultimately, this implies a very weak outlook for the consumer this year."
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