British households in February experienced a sharp deterioration in their financial well-being and heightened expectations of a Bank of England rate hike within the next six months amid a strong rise in living costs, data from IHS Markit showed.

The IHS Markit Household Finance Index, a monthly gauge of financial well-being, fell to 42.2 in February from 42.9 in January, the greatest squeeze on household finances since July 2017.

U.K. households also had to cope with the sharpest increase in living costs in a year, which quickened to 83.6 in February from 83.3 in the previous month. Households anticipate higher living costs in the coming 12 months, with the index measuring inflation expectations easing slightly to 90.2 from 91.2 in January. Inflation rose to 2.7% in January, up from 2.5% in December 2017.

Cash available to spend fell at its fastest pace in ten months, while income from employment increased marginally. The index measuring workplace income at 50.6 was down from 51.3 in January, the slowest pace of pay growth for three months. This dampened appetite for major purchases to 37.6 in February from 38.4 in January.

"The latest survey adds to evidence that U.K. households have seen an erosion of their financial well-being so far this year, with stubbornly high inflation the main factor placing pressure on consumer budgets," said Tim Moore, Associate Director at IHS Markit. "In response to squeezed incomes and concerns about the financial outlook, households appear to have reined in spending, particularly on big-ticket items."

The survey also showed 37% of households in February foresee a Bank of England rate rise in the next three months, up from 21% in January, while 60% of U.K. households now anticipate a rate hike within the next six months, up from 45% at the start of 2018. "There has been a clear shift in interest rate expectations since the start of 2018, suggesting that households are closely in tune with the more hawkish mood among policymakers," said Moore.

Households' expectations for finances in the next 12 months remained downbeat, inching lower to 47.6 in February from 47.7 in January.