UK Markets closed

Soaring energy bills keep inflation high

Essential costs for food and fuel rose in December, keeping inflation high despite drops in the price of clothes and petrol.

The Office for National Statistics (ONS) said the Consumer Prices Index (CPI) was unchanged in December at 2.7%, 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.

[Related link: See if you could save on bills by switching provider]

Food prices were also up 1.2% year on year – with fruit, meat, vegetables and dairy products the main contributors. There are also fears prices will keep rising, with poor harvests putting more pressure on major food costs.

This will be especially harsh for pensioners, who spend more of their income on essential costs such as food and fuel and less on areas where prices are rising less quickly such as restaurants and hotels, education and furniture and household goods.

"These bleak figures confirm it - for many pensioners this is turning into a winter of discontent," said Steve Wilkie, director of the pension specialists Responsible Annuities.

"The steadily rising cost of living is eroding everyone's spending power, but anyone who relies on savings for income is feeling the pinch more than most."

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.

Clothes and footwear prices also fell between this year on year – dropping 1.5% since December 2011.

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.