The squeeze on household incomes will tighten once again this week when inflation edges up towards 3pc twice the level of pay rises.
Economists at Investec (LSE: INVP.L - news) expect the Office for National Statistics (ONS) to reveal that the annual rate of inflation, under the consumer prices index (CPI (Other OTC: CPIC - news) ), rose to 2.9pc in December from 2.7pc a month earlier .
The retail prices index (RPI), typically used for wage settlements, is forecast to have climbed from 3pc to 3.2pc.
Rising inflation threatens to dent the Government’s recovery hopes by eroding consumers’ disposable incomes. Average earnings rose by just 1.3pc in October, according to the most up-to-date data from the ONS.
The Government is gambling on an improvement in family fortunes to lift the economy this year. According to its independent forecaster, the Office for Budget Responsibility, household consumption should account for 0.5pc of the forecast 1.2pc growth.
The latest figures have not been encouraging.
Recent results updates from retailers for the Christmas period suggest consumer spending was “fairly underwhelming”, according to Vicky Redwood at Capital Economics.
And official retail sales data on Friday is expected to reinforce the impression that there was a “sluggish end to the year”, Philip Shaw, UK economist at Investec, said.
A weak consumer would follow a poor end to 2012, when the economy is now expected to have shrunk again. The National Institute for Economic & Social Research has estimated that GDP contracted by 0.3pc in the final quarter , after the 0.9pc rise in the previous three months.
The uptick in December CPI prices will not come as a surprise as it will have been driven by recent increases in domestic gas and electricity bills. Mr Shaw said the pre-announced tariff rises alone would have accounted for a 0.3 percentage point rise in CPI.
He expects inflation to climb above 3pc within the next few months, which would force Bank of England Governor Sir Mervyn King to write another letter of explanation to the Chancellor before his term expires in June. Inflation hit a low of 2.2pc in September, but has been on an upward trajectory since.
For the first time, the ONS figures will carry a disclaimer with the RPI number after the National Statistician ruled last week that the methodology used to calculate the figure did not meet international standards . Economists had widely expected the calculation to be changed, which would have saved the taxpayer £2.5bn annually on interest paid on government debt but punished pensioners on inflation-linked final salary pensions.
From March, the ONS will publish a second RPI measure using a qualifying equation.