Pressure on Bank to raise interest rates as cost of living increases

The Consumer Prices Index (CPI) rate of inflation surged to 3.7 per cent last month, its highest level since April and up from 3.3 per cent in November, the Office for National Statistics (ONS) said. Economists were expecting the rate to rise to 3.4 per cent.

Surging food costs, nudged up by the weather disruption, energy bills and petrol prices led to a month-on-month prices increase of 1 per cent between November and December, the biggest monthly rise since records began in 1996, the ONS added.

The Bank, which is tasked with bringing inflation down to its 2 per cent target, has resisted lifting interest rates from historic lows of 0.5 per cent as the wider economy battles with slow growth. The rate of CPI has been above its 2 per cent target every month since November 2009.

Policymakers at the Bank's Monetary Policy Committee (MPC) believe the stubbornly-high inflation is being caused by temporary factors, such as spikes in commodity prices and January's VAT rise from 17.5 per cent to 20 per cent.

And as the Chancellor's belt-tightening austerity measures start to kick in, the Bank will be under further pressure not to throw the fragile recovery off course.

Sterling was around 1 per cent higher against the dollar as traders factored in the chances of an earlier-than-expected rise in interest rates.

Economists said the figures would provide "more headaches" for the MPC.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "Despite the undeniably significant risk to growth coming from the fiscal tightening that is now increasingly kicking in, there is mounting pressure on the Bank of England to enact at least a token near-term interest rate hike to send out the message that it has not taken its eye off the inflation ball."

But Philip Shaw, chief economist at brokers Investec, said a rate rise would put the recovery at risk.

He said: "A sharp increase in rates certainly seems unjustified, but any hike in rates at all now is potentially dangerous."

Brian Hilliard, economist at Societe Generale, said despite the pressures, he did not expect an interest rate hike next month.

He said: "The BoE has already predicted in the December minutes that the inflation rate would touch 4 per cent in the spring so is unlikely to be bounced into a February rate increase by today's data or by January's, which should be provided to the MPC in time for that meeting."

The rise was driven by a 1.6 per cent increase in the price of food, the highest rise for a November to December period, and a 3.6 per cent surge in transport costs, the highest ever monthly increase on record.

The big freeze pushed up the price of vegetables in December as supplies were choked by disruption to distribution channels and crop damage.

The ONS said cauliflowers were particularly badly hit by the Arctic weather, which caused a shortage that led to a 75.6 per cent rise in prices.

There were price hikes across most bread and cereals, aggravated by the wildfires that wrecked Russia's harvest and caused the country to impose an export ban.

The price rises brought in by utility companies also started to feed through to consumers in December, with gas particularly badly affected, pushing up the cost of housing and household services by 1.4 per cent.

Five of the "big six" energy firms - Scottish & Southern, Scottish Power, British Gas, npower and E.ON - have all unveiled bill hikes in the last two months.

Petrol prices also continued to rise to 1.22 per litre, the ONS said.

Airfares were up by 41.8 per cent between November and December, compared to a 41.7 per cent rise in the same period a year ago.

But there was downward pressure on pricing from clothing and footwear, where prices fell by a higher-than-average 1.9 per cent as the havoc caused by the snow forced retailers to compete for sales.

Other measures of inflation also increased. The Retail Prices Index, which includes mortgage repayments, rose to 4.8 per cent from 4.7 per cent in November.