14/01/13
By Angela Rees
The high cost of living is still putting a strain on hard-pressed families as inflation figures are expected to remain at 2.7 per cent for the third month in a row.
The steep rise in energy bills will be reflected in the Consumer Price Index (CPI), causing some experts to believe the figure could even be 2.9 per cent for December and rising to 3 per cent by this summer.
However, the price increases from four of Britain's "big six" energy suppliers will not have had as big an impact in December as they could have.
This is because oil prices have fallen, leading to lower fuel costs, and food inflation is likely to be below the 1.4 per cent jump seen a year earlier.
However, this brief respite in food price hikes is not expected to remain the case for long.
This is because inflation is set to soar over the coming months following poor UK harvests due to last year's severe wet weather, as well as crops hit overseas by adverse conditions.
The government's target for inflation is 2 per cent.
Anything above this level is proving a challenge for Bank of England policymakers as they weigh up signs of the economy contracting in the fourth quarter against increases in the cost of living.
They will have to consider whether to opt for pumping more money into the economy through more quantitative easing, but may be reluctant to give it the go-ahead given the outlook for inflation.
Philip Shaw, chief economist at Investec Securities, warned that CPI is "getting close to the level - above 3 per cent - where Sir Mervyn King or his successor Mark Carney would have to write another explanatory letter to the Chancellor.
Shaw added: "We think this is likelier than not to happen, but on our profile we do not expect it until around mid-year".
Howard Archer, chief UK and European economist at IHS Global Insight, also agreed that overall inflation would hit 3 per cent in first half of 2013 as it is pushed up by increasing energy tariffs and further rises in food prices.
But Archer added that overall inflation should fall "markedly" in the final months of 2013, down to around 2.2 per cent.
Inflation has already been in the spotlight this month as a review of the Retail Prices Index (RPI) found that the current calculations do not meet international standards.
However, the outcome was that RPI would stay as it is, which is good news for pensioners who would have seen their annuity payments from their private pension pots fall if it had been brought more in line with CPI.
Instead, a new index will be created from March, called RPIJ, which will use a different way of calculating the prices of goods and be closer aligned to CPI.
