ANNUAL UK inflation remained significantly above target at 2.7% in December, as hikes in gas and electricity bills prevented it from falling back, official figures show.

And economists predict that inflation could increase in the short term, citing further rises in utility bills and the potential for bad harvests to push up food prices.

Annual consumer prices index (CPI) inflation in December, which compares with a 2% target set for the Bank of England by the Treasury, was unchanged from the rates in October and November and was in line with City forecasts.

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The Office for National Statistics noted as it published the data yesterday that, although the annual inflation rate remained unchanged, this reflected a balancing out of big upward and downward influences.

The ONS said the rise in electricity and gas bills exerted the biggest upward influence on the annual inflation rate last month, as several companies raised their prices. It calculated annual electricity and gas price inflation at 3.9% and 5.2% respectively.

Air fares exerted the largest downward pressure on the annual CPI inflation rate in December, rising at a far slower rate than a year earlier, the ONS noted.

Annual inflation on the old all-items retail prices index measure edged up from 3% in November to 3.1% in December, with the ONS citing utility bill increases as the largest contributor to this rise.

Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "It still looks very possible that increased energy tariffs and higher food prices could push consumer price inflation up to 3% early in 2013 and keep it there for a while.

"Further utility price hikes will kick in during January, while bad harvests look likely to push food prices higher."

He predicted annual CPI inflation would hover around 3% during the first half of 2013, before falling back later in the year.

He added: "Consumer price inflation up at 2.7% is putting a significant squeeze on consumers' purchasing power given that latest data show that annual earnings growth was only half this rate at 1.3% in October. This is worrying for growth prospects in 2013, as much will depend on how much consumers spend."