The average household is £5 a week worse off than last year. The cost of living rose by 4.9 per cent to £388 a week. Earnings also increased but soaring bills for essentials such as food and transport mean that disposable income has fallen to £138 a week. The research by the Centre for Economics and Business (CEBR) forms a grim backdrop to Alistair Darling’s first Budget next week. Ministers are aware of widespread concern about rising fuel and mortgage costs and the Chancellor may attempt to meet those worries among the public.

An internal report published alongside the Budget is expected to call for the introduction of more long-term fixed-rate mortgages.The Treasury is also understood to have considered options such as vouchers to help the poorest households with their gas and electricity bills. Energy companies have been criticised for increasing prices by up to 15 per cent while reporting huge profits.

Mr Darling is believed to have rejected the idea of a windfall tax on energy profits. He is looking to the industry to come up with measures to prevent the need for a compulsory tax.

The CEBR carried out the research on behalf of the supermarket group Asda. It found that the average family had to pay 6.1 per cent more for food in January compared with January 2007, and 6.4 per cent more for transport. Petrol prices were nearly 20 per cent higher. Only a 4.8 per cent fall in the cost of clothing helped lessen the pressure on consumers’ wallets. Average earnings rose by £22 a week.

Households in Wales have been worst affected by spiralling costs, the CEBR said. The average family has £45 a week to spend on leisure and recreation once weekly bills are met. This is more than 12 per cent less than they had to spend in January 2007. Prompted by the rising mortgage costs, the Financial Services Authority (FSA), the financial watchdog, launched a £2 million advertising campaign yesterday to encourage home-owners to seek help and advice. It is estimated that 1.4 million people will face higher mortgage bills when their fixed-rate deals end this year. The average increase will be £100 a month.

Chris Pond, the FSA’s director of financial capability, said: “Economic conditions are getting tougher, putting pressure on family finances. As the UK’s financial watchdog we can help.”

Andy Bond, chief executive of Asda, said: “The latest figures indicate that 2008 is going to be a tough year for customers and confirms what we’ve known for some time: that household budgets are stretched to the limit.”

Mr Bond said that retailers had a part to play in keeping prices low in order to keep a lid on inflation. Debt charities report that they are receiving more and more calls from people struggling to pay everyday bills. Chris Tapp, of the charity Credit Action, said: “When you add together the increases in grocery bills, energy costs and the fact that all credit is getting more expensive, it means that the real cost of inflation is far above the Government’s measure.

“We are helping people whose finances are being squeezed significantly. They are not just worrying about mortgage repayments, but are struggling to cover the cost of living week to week.”

Mr Darling has been told that the Government must invest more in supporting working families if it is to reach its target of halving child poverty by 2010. The Commons Work and Pensions Committee said yesterday that, on current trends, it would miss its target by one million children. Mr Darling will say a week tomorrow that the Government remains firmly committed to ending child poverty by 2020.

There may be some limited increase in cash benefits and changes in housing benefit rules and income tax to assist single earners with children. But with spending tight, borrowing high and growth forecasts expected to be revised downwards, Mr Darling has little room for generous gestures next week. Any thoughts of a “giveaway” will be delayed until his preelection Budget, next year or the year after.

Times Recommends

• Sarah Brown says 'no thanks' to veal at G8 - twice
• Stockton-on-Tees is obesity capital of Britain
• Stores blame poor sales on Murray factor