Inflation rate remains unchanged at 2.7%

Winter energy bill hikes helped keep the annual rate of inflation at 2.7% for the third month in a row, official figures showed today.

The Office for National Statistics (ONS) said the Consumer Prices Index (CPI) was unchanged in December, although some economists predict it could rise to above 3% by the summer.

Price increases from four of the "big six" energy suppliers came into effect last month, dampening the impact of a fall in fuel costs.

Housing and household costs, which includes gas and electricity, rose 2% between November and December.

But the rate of transport cost increases declined, with petrol prices falling by 2.8p per litre between November and December, compared with a fall of 1.1p a year earlier. Diesel prices fell by 1.4p per litre, compared with a year ago, the ONS said.

Today's figures also show the rate of the Retail Prices Index (RPI), which includes housing costs, rose to 3.1%, up from 3% last month. It was also pushed up by rising fuel bills.

Experts do not believe inflation will stay at 2.7% for long, with food inflation set to increase over the coming months after poor UK harvests due to last year's severe wet weather.

However, there was some encouragement from the first drop in the rate of core inflation since July.

Vicky Redwood, chief UK economist at Capital Economics, said: "In other words, sluggish consumer demand seems to have prompted retailers to discount a bit more heavily than last year over the festive period."

However, she predicted CPI will probably stay relatively high for most of this year, prompting households' pay in real terms to fall again in 2013. This will be followed by inflation falling back below its 2% target towards the end of the year as the food and energy effects fade.

A Treasury spokeswoman pointed out that inflation was nearly half of its 5.2% peak and that the Government had taken more action to help households with the cost of living, including a further increase in the tax-free personal allowance and cancelling the fuel duty increase that was planned for this month.

Above-target inflation is proving a headache for Bank of England policymakers as they weigh up mounting signs of economic gloom against faster increases in the cost of living.

The economy is looking likely to have suffered a fresh contraction in the fourth quarter, according to some estimates, and could be heading for an unprecedented triple-dip recession.

But the Bank may be reluctant to push the button for more quantitative easing (QE), given the outlook for inflation.

Labour Treasury spokeswoman Catherine McKinnell said: "It's worrying that inflation remains high and prices are continuing to rise so much faster than wages. But instead of easing the squeeze, ministers are adding to the cost of living crisis for people on middle and low incomes.

"On top of soaring energy bills, millions of families and pensioners will soon be hit by the Government's granny tax, cuts to working tax credit and child benefit while 8,000 millionaires get a tax cut.

"This out-of-touch Government has got its priorities all wrong. Instead of giving a £3 billion tax cut to the very richest David Cameron and George Osborne should be helping people on modest incomes who are struggling with the rising cost of living."

PA