The study reveals consumer spending power has fallen dramatically in the face of massive price hikes in the cost of living.
"Many UK consumer segments are clearly feeling the pinch as big rises in household costs are far outstripping relatively modest wage inflation," said Jason Gordon, director of retail at Ernst & Young.
According to the study, after tax contributions and monthly household bills, the average family now has under 20 percent of its gross income left over, compared with 28 percent in 2003.
Ernst & Young said the pace of the squeeze on the consumer has accelerated rapidly over the last year, with discretionary monthly spending as a proportion of gross household income falling by almost 12 percent in 2007/8, the fastest rate of decline over the last five years.
"It's clear that household budgets are under enormous strain. Add in the impact of falling house prices on the consumer's propensity to spend, and the consumer economy is undoubtedly on a knife-edge," said Gordon, who added that the worst may be yet to come.
"If, as predicted, utility prices rise by as much as 40 percent later this year and interest rates are increased to control rising inflation, consumers and consumer facing businesses will face even bleaker times," he said.
