Office for National Statistics said that annual rise in the cost of living was 2.7% for the third month running in December
Steep rises in energy bills kept inflation high in December, putting more pressure on household budgets and fuelling fears that consumers will be unable to drive an economic recovery in the UK.
The Office for National Statistics said that the annual increase in the cost of living, as measured by the consumer prices index, stuck at 2.7% for the third month running in December.
Five of the big six energy companies introduced price rises in December, hitting some 25m households. That was partially offset by a decline in petrol prices, which fell by 2.8p a litre between November and December.
Policymakers are particularly concerned about inflation, as prices are rising much faster than wages, hammering consumers’ spending power. Consumers account for around two-thirds of all spending in Britain, which is still fighting to avoid falling into a triple-dip recession.
Rob Wood at Berenberg Bank said: “Above-target inflation means households’ hard-earned pounds are not stretching as far as they used to. With export conditions tough and households unlikely to drive growth in the near-term, the theme for the next six months is likely to be one of the economy bouncing along the bottom.”
Stubbornly high inflation, which has been running above the Bank of England’s 2% target since November 2009, is likely to have been a key argument against expanding the quantitative easing programme at the bank’s monthly policy meeting last week, as pumping more money into the system drives prices higher. In November, the bank said inflation would peak in the third quarter of 2013 and would only fall below the 2% target in the third quarter of 2014.
The ONS said the cost of housing and household services rose by 2% between November and December, driven by escalating gas and electricity bills. Air fares helped offset the increase, with prices rising at a far slower rate than a year ago. Food inflation remained high at 3.8%, prompting some economists to say that could accelerate in the coming months.
The figures appear to put an end to the spat between retailers over whether there was more discounting on the high street ahead of Christmas this year. The ONS said the price of clothing declined by 1.5% between November and December, compared with a fall of 2.8% in 2011.
Economists said inflation could move above 3% this year, which would trigger a letter from the Bank of England to the Treasury explaining why it had missed its 2% target by a percentage point. Peter Dixon at Commerzbank said: “It’s entirely possible that by mid-year we’ll get a very sharp spike in inflation back above 3%. While the inflation numbers do seem to slip down the Bank of England’s agenda – which is clearly focused on growth – there’s no doubt that the inflation target itself continues to come in for a battering given what’s been happening to prices not just in December but over a period of years.”