A toxic mix of spiralling oil prices and a tumbling pound sent inflation to a nine-month high in February, putting the squeeze on motorists, households and businesses.
The Consumer Prices Index, stuck at 2.7 per cent since last October, edged higher to 2.8 per cent last month – twice as fast as the 1.4 per cent growth in wages over the past year.
Experts fear today's rise will be the first leg in a succession of increases, taking the rise in the cost of living well above 3 per cent by June. The rise also darkens the economic backdrop for the Chancellor as he presents his Budget.
The main culprits behind the increase were a 4p jump in petrol prices – the biggest in a single month since January 2011 when the Chancellor's VAT hike to 20 per cent came into force – and a sharp increase in air fares on European routes. The energy supplier E.ON's 8.7 per cent jump in gas and electricity bills also heaped pressure on stretched household finances despite some relief from easing food inflation.
Signs of the rising pressure on businesses also emerged as factory gate prices jumped 0.8 per cent in February – their biggest month-on-month rise for nearly two years.
The figures also showed manufacturers buckling under a sharp 3.2 per cent rise in the cost of imported goods thanks to the 7 per cent fall in the pound's value so far this year. This was compounded by the biggest surge in oil prices since last August, up 7.1 per cent on the month, as Brent crude peaked at $118.90 in early February.
Although higher producer prices can take at least year to feed into rising high street prices, Barclays' chief UK economist, Simon Hayes, warned: "Higher imported inflation is likely to be a significant influence, and the February producer price data showed a clear build-up of pipeline pricing pressures... The recent fall in sterling fed through into higher prices of imported materials, a trend that looks set to continue."
The Bank of England is already braced for inflation to stay above its 2 per cent target until at least the end of 2015, but the Monetary Policy Committee is so far choosing to look past this because of the weakness of the recovery. The UK economy shrank 0.3 per cent in the final three months of 2012 and is headed for marginal growth at best in the opening quarter of 2013. The independent Office for Budget Responsibility is expected to cut its growth forecast today to 1 per cent or less for this year, from 1.2 per cent in the Autumn Statement.
Rob Harbron, an economist at the Centre for Economics and Business Research, warned that rate-setters faced a balancing act between maintaining growth and controlling inflation as the Chancellor's austerity measures drag on growth. He said: "Consumers are under pressure. As weak wage growth continues and the cap on social security benefits uprating at 1 per cent is planned for April, the cost of living continues to outpace increases in income.
"Economic growth in 2013 is likely to be constrained by the pressure on real incomes, alongside government austerity and a tough export environment, given eurozone recession."
The Office for National Statistics' new measure of inflation, CPIH, which includes housing costs, rose to 2.6 per cent in February. Adopting this benchmark as the new target rate for the MPC is one option open to Mr Osborne when he launches his expected review of the Bank of England's mandate.