NSW households are battling living costs as daily expenses outpace official inflation figures, the latest quarterly ING DIRECT Financial Wellbeing Index shows.

The report revealed more than one in four (26 per cent) NSW households say everyday bills have grown above 10 per cent over the last 12 months. The greatest price hikes have occurred in essential spending - health, education and fuel. Seniors are hardest hit - 39 per cent of 55-69 year olds say their bills have risen by more than 10 per cent.

In the first quarter of 2011, the ING DIRECT Household Financial Wellbeing Index dropped to 104.8 - down from 106.5 - the lowest level since the inception of the Index in March 2010.

Financial wellbeing in NSW is slightly below the national level, with a state-based Index score of 104.5.

NSW households say their cost of living has risen on average by 6.3 per cent over the last year - more than double the CPI (currently 2.7 per cent).

The report also found 40 per cent of NSW households are uncomfortable about their ability to meet everyday expenses, and 6 per cent say it is impossible to pay bills when they fall due.

The cost of health, utilities and fuel have increased significantly, the households say. NSW households are facing a serious cash squeeze as the cost of everyday essentials outpace official inflation figures.

Eight out of ten (82 per cent) of the state's households say utilities like power and phone have become more expensive over the last six months. Over 80 per cent say fuel and transport costs are up. Almost seventy per cent (67 per cent) say health and schooling bills have escalated.

On average, NSW households say their bills have risen by 6.9 per cent over the past 12 months.

Reflecting the price hikes, 40 per cent of households are uncomfortable about their ability to pay bills. Six per cent are finding it impossible to meet bills when they fall due. Only 8 per cent report no difficulty meeting regular bills.

Mr Don Koch, CEO of ING DIRECT, says, "NSW households are feeling the pinch of higher living expenses and budgets will need to be adjusted accordingly. Governments should understand that households are facing fixed cost increases that are much higher than the official measure of inflation."