Inflation set to continue upward trend fuelled by energy prices

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SOARING energy costs are expected to stoke up inflation in the new year, putting further pressure on households and businesses.

The Consumer Prices Index (CPI) remained at 2.7 per cent in November, with higher food costs and the first energy price hike by Scottish supplier SSE offset by a fall in fuel prices.

But with price increases from the other five energy providers set to come into force, analysts think CPI inflation will peak at 3.5 per cent by mid-2013.

The Office for National Statistics said upward pressure from gas and electricity prices pushed housing and household services inflation up by 0.6 per cent.

But last month’s figures do not account for price rises by the remaining five of the “big six” energy providers which have imposed, or are set to impose, price increases of between 6 per cent and 10.8 per cent.

Increases in the price of fruit, bread and cereals also pushed up the CPI rate, the ONS said.

But a fall in the cost of transport was the biggest factor which kept the rate of inflation down. Petrol prices fell by 3p to £1.35 per litre, while diesel dropped 1.5p to £1.42 per litre in November.

The figures also show that the rate of the Retail Prices Index (RPI), which includes housing costs, fell to 3 per cent in November, from 3.2 per cent in October as transport costs and mortgage interest payments fell.

Steady inflation will be a relief for policymakers after a shock jump in October.

The rate increased to 2.7 per cent from a three-year low of 2.2 per cent in September.

Any increase in inflation would fuel speculation that the Bank of England will hold off from taking further action under its economy-boosting quantitative easing (QE) programme.

A Treasury spokeswoman said: “Inflation is nearly half of the 5.2 per cent peak it reached last year.

“At the Autumn Statement, the Government took more action to help households with the cost of living including a further increase in the tax-free personal allowance and cancelling the fuel duty increase that was planned for January.”

Samuel Tombs, an analyst at Capital Economics, said inflation looked set to hover between 2.5 per cent and 3 per cent for the best part of next year, as further increases in utility and food prices kick in.

And with annual growth in average earnings at 1.3 per cent in October, it means the squeeze on households’ spending power will persist throughout 2013.

However, he added: “We have not lost faith in our view that the large amount of spare capacity in the economy will mean that inflation will eventually fall to a very low rate.”

Unison general secretary Dave Prentis said the latest figures were the “lull before the storm”.