Inflation still hurts as gas and electricity bills keep up pain

The latest hammering for millions of households from soaring gas and electricity bills kept the cost of living stubbornly high last month, figures showed today.

The Bank of England's consumer prices index stood at 2.7 per cent for the third successive month in December, well above the Monetary Policy Committee's 2 per cent target and even further above the average 1.7 per cent annual increase in wages.

The impact of price hikes from the "big six" energy suppliers triggered a 5.2 per cent jump in gas bills and a 3.9 per cent rise in average electricity costs, the highest since August when a previous round of even steeper rises was being felt. The increases put yet more pressure on consumers' disposable incomes as Britain cranks up the heating to ward off the current cold snap.

Motorists were spared by a bigger drop in fuel costs than a year earlier and air fares rose far less steeply, keeping a lid on the headline inflation rate for now. But the high street added to the cost of living by cutting prices less steeply than in December 2011, when the UK slipped into a double-dip recession. The inflation pain is also likely to be more keenly felt later this year when food prices march up due to high global commodity prices and rain-affected harvests, pushing the CPI back towards 3 per cent. This will tie the hands of the MPC over pumping more aid into a fragile recovery.

Chris Crowe, an economist at Barclays Capital, said: "We forecast inflation to remain above the 2 per cent target in the medium term, as domestic energy prices are likely to maintain their upwards trend, higher university tuition fees will feed into CPI inflation for the next three years, and pressure on firms' margins from high unit labour costs, a symptom of the UK's poor productivity performance, is likely to continue."

Savers have also taken a pounding from persistent inflation as well as the flood of cheap cash on offer from the Bank through its Funding for Lending Scheme. The deluge means banks have little incentive to offer better rates for savers to bring in funds.

According to industry experts there are just three ISAs on the market which protect savers from tax and inflation.

Sylvia Waycot, a finance expert for the comparison website Moneyfacts.co.uk, said: "2013 is starting out as a dreadful year for savers with little hope of change. Providers are not even pretending to offer competitive rates and with no real interest to be earned, inflation is really going to bite the weary saver."

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