The average disposable income per head in the UK fell from £3,780 to £3,767 in the last three months of 2012, according to analysis by the Office for National Statistics.
On top of this expenditure rose by £4 to £3,608 which is squeezing people's finances to breaking point.
Most of the increases in costs have come from utility bills, with many individuals struggling to make payments for the energy they consume.
Including all services provided by the government – such as education – and benefits received, households were still £17 worse off in the fourth quarter.
The biggest cause of the squeeze is the rising rate of inflation which has held steady at 2.8 per cent in March 2013 but is expected to reach and exceed three per cent in the coming months.
Inflation remains twice the level of the average wage and is slowly chipping away at households' disposable income.
A spokesperson for the Treasury defended the rate of inflation, saying it is now almost half its peak of 5.2 per cent.
"The government has taken continued action to help households with the cost of living, including increasing the tax-free personal allowance and freezing fuel duty for nearly three and a half years."
However, more people in the UK are struggling to manage their finances and this lowering of disposable income means less money will be available for repayments. For this reason many individuals are opting for a debt solution such as a consolidation loan to potentially free up more funds.
Fortunately for households, the rise in prices during March was largely in discretionary purchases like entertainment media and electronics, while the cost of essentials like petrol rose more slowly.
In 2012 as a whole, the average disposable income, adjusted for inflation, increased by £176 to reach £15,001, still much lower than it was in 2007.
With the cost of living increasing, the chances of people increasing their personal debt are also rising. It's important for individuals to assess their finances to make sure expenditure does not exceed their income.
By Joe White