But the news disappointed financial markets and the higher mortgage rates to be announced today added fears that inflation would climb above December's 2.9 per cent.
The figures pointed to the need for more interest rate increases, according to most analysts in the City. They believe the Bank of England will raise base rates by another 1/2 percentage point by April.
Retail prices rose 0.5 per cent in December, taking the year-on-year rate of inflation to 2.9 per cent from 2.6 per cent in November. Excluding mortgage interest payments, the inflation rate rose from 2.3 per cent to 2.5 per cent. Both rises exceeded City expectations.
Budget increases in excise duties partly explained the increase in prices during the month, but not the year-on-year jump, as there was a similar effect last December.
There were, in addition, sharp rises in food prices, despite the pre-Christmas turkey price war. Prices for household goods and personal goods and services also increased unexpectedly. Higher mortgage rates will add to the headline retail prices index from January.
Adam Cole, UK economist at James Capel, said: "This is the first hint that retailers are managing to make price increases stick. If they succeed there is significant scope for pent-up increases to come through."
There was some dissent from this view. Steven Bell, Morgan Grenfell's chief economist, thought last month's inflation figure simply reflected new stocks reaching the shops. He said all the anecdotal evidence contradicted the notion that retailers would be able to achieve lasting price rises. The British Chambers of Commerce agreed that there was still downward pressure on retail prices.
Figures on average earnings, also released yesterday, show their underlying growth in the 12 months to November steady at 3.75 per cent, after October's increase was revised down from 4 per cent. Settlements for the coming year continued to rise during 1994, however.
Steady earnings growth, combined with productivity growth of 6.2 per cent in the year to November, meant manufacturers' unit costs fell 1.3 per cent in the three months to November. That was a smaller fall in costs than in the previous few months.
The near-record drop in unemployment was as big a surprise as the jump in inflation. Joblessness fell for the 11th successive month, to 2.414m in December. The unemployment rate of 8.6 per cent was the lowest since August 1991.
The latest quarterly Labour Force Survey showed a rise in employment of 115,000 between the summer and autumn (September to November). Of this increase, 102,000 jobs went to men and 13,000 to women. The number of full-time jobs rose by 127,000, while thenumber of part-time jobs fell by 11,000.
Robert Barrie, UK economist at BZW, said: "The economy is growing quickly and this is translating into jobs."
The Public Sector Borrowing Requirement fell to £700m in December from £3.5bn the previous month. Although debt interest payments are running 17 per cent higher this financial year than last, departmental spending is more subdued. This is due partly to lower social security payments as joblessness falls.