By Ian McConnell

Business Editor

ANNUAL UK inflation surged to its highest rate for nearly 30 years in December, according to official figures yesterday which underline the scale of the cost-of-living crisis facing households, and further increases are forecast.

The data from the Office for National Statistics showed annual consumer prices index inflation rose from 5.1 per cent in November to a greater-than-forecast 5.4% last month. Economists polled by Reuters had expected annual CPI inflation would have risen to 5.2% in December. Inflation has consistently surprised on the upside in recent times.

The ONS data prompted warnings that inflation could go as high as 7%, unless the UK Government takes major action to limit an anticipated surge in household energy bills. Analyst Cornwall Insight is predicting a 51% jump in the cap on household energy bills for a typical dual fuel customer on a standard variable tariff to £1,925 per annum when it is reviewed next month by regulator Ofgem. The rise in the price cap takes effect from April 1.

Annual CPI inflation is now 2.7 times the 2% target set for the Bank of England by the Treasury.

Yesterday’s figures were viewed as increasing pressure on the Bank’s Monetary Policy Committee to raise benchmark interest rates further. The MPC increased UK base rates from a record low of 0.1% to 0.25% last month.

“This is the highest CPI 12-month inflation rate in the National Statistics data series which began in January 1997, and it was last higher in the historical modelled data series in March 1992, when it stood at 7.1%,” the ONS noted.

It added that average petrol prices stood at 145.8 pence per litre in December 2021, unchanged from the all-time high recorded for November and up from 114.1p a litre a year earlier.

Electricity prices in December were up by 18.8% on the same month of the previous year, the ONS figures showed. Gas prices were 28.1% higher.

The ONS observed the main upward contributions to the change in the annual inflation rate between November and December came from food and non-alcoholic beverages, restaurants and hotels, furniture and household goods, and clothing and footwear.

Experts flagged the pressure on households from surging prices and impending rises in national insurance contributions. Laith Khalaf, head of investment analysis at stockbroker AJ Bell, said: “Inflation is going to pile serious pressure on UK households in the next few months, particularly when combined with the tax rises the Chancellor [Rishi Sunak] has planned for April. The main issue is that price rises are being most keenly felt in energy and transport, areas where expenditure is unavoidable, and which constitutes a bigger slice of the budgets of those on lower incomes.”

Ed Monk, associate director at fund manager Fidelity International, said: “With inflation now at its highest level in almost 30 years, many households simply won’t have experienced price rises at this level before. With wage data [on Tuesday] showing pay rising at just 3.5%, families are getting poorer in real terms and the situation could last for some time. Again it’s fuel costs – both energy bills and motor fuel – that are adding most to the squeeze but in truth there’s upward pressure in all areas.

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“The next few months, in particular, will be painful as household energy bills are forecast to rise further and a planned rise to national insurance kicks in from April. The monetary policy response to inflation – raising interest rates – will only add to the squeeze but the Bank of England will feel great pressure to act and take some steam out of price rises if it can. Some economists are forecasting multiple rate rises this year, and the first test of that comes next month.”

He added: “Clearly, the financial pressure on households is likely to dampen sentiment and this could feed through to weaker growth overall.”

Sarah Coles, personal finance analyst at stockbroker Hargreaves Lansdown, said: “Inflation is the horrible nineties trend we didn’t want to see again, but it’s back. CPI inflation has hit 5.4% for the first time since it was first measured 25 years ago. If CPI had been around a bit longer, we wouldn’t have seen it this high for 30 years. And this isn’t the last of it: the Bank of England expects inflation to peak around 6% in April, but unless there’s significant intervention in the energy market, there’s every chance it could go as high as 7%.”

She added: “This piles the pressure on the Bank of England when it meets to discuss rates [in early February]. It hasn’t been this far off its inflation target of 2% since it [was] first set. And when you add rising inflation to falling unemployment and record-low redundancies, it makes the argument for raising rates far stronger. [The Bank] won’t want to panic borrowers, businesses or investors by raising rates too far or too fast, but it can’t afford for inflation to get out of control either.”

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The EY ITEM Club think-tank flagged its expectation that inflation will rise significantly further in the short term. But it believes inflation could drop back below the 2% target in 2023.

Its chief economic adviser, Martin Beck, said: “The EY ITEM Club thinks CPI inflation is likely to move to just over 6%, with the risks skewed towards a higher outturn. It then expects inflation to slow in H2 2022 and 2023. Strong base effects will come into play, while oil and natural gas prices could fall back.

“Furthermore, as the Omicron wave fades, the rotation of consumer spending back towards services and away from goods should help to calm pressures on global goods prices. Given there is still little evidence of any escalation in domestic underlying inflationary pressures, the EY ITEM Club thinks inflation could fall below the 2% target during 2023.”