The rise in VAT has contributed to an 'astonishing' fall in consumer confidence, according to new figures.
Research conducted by GfK NOP has revealed that confidence in the state of the UK economy plummeted between December and January to its lowest level for almost two years.
The eight point fall was the most marked decline in confidence since December 1994.
GfK NOP said the figures would make talk of a double-dip recession 'unavoidable'.
People's views in their own financial situation, the state of the economy and conditions to make major purchases have all fallen, with the rise in VAT from 17.5 to 20% largely to blame.
Earlier this week, the Office for National Statistics said that the economy had contracted by 0.5% in the final three months of 2010.
Inflation is also way above the Government's long term target of 2% at 3.8%.
"January's eight point drop represents an astonishing collapse in consumer confidence," said Nick Moon, MD of GfK NOP Social Research.
"In the 35 years since the Index began, confidence has only slumped this much in a single month on six occasions, the last being November to December 1994.
"The VAT increase is the first of the Government's austerity measures that has had a widespread impact on consumers, and it seems to have hit people's economic confidence hard, especially as the biggest drop was in consumers' appetite for major purchases.
"With inflation on the up and the full force of the cuts yet to hit, these figures could be the beginning of a very painful period."
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