Scottish families to be £1300 a year worse off

• David Cameron's government has admitted its 'huge concern'. Picture: AP

Figures released yesterday revealed inflation had leapt to 3.7 per cent, the highest rate for eight months, spelling more gloom for households already struggling with rising taxes.

Soaring food prices, energy bills and petrol prices drove up inflation far more severely than experts had predicted. Most had expected the Consumer Prices Index (CPI) to hit 3.4 per cent last month.

But the 3.7 per cent figure - up from 3.3 per cent in November - was the highest since April, leading analysts to suggest the Bank of England may be forced to raise interest rates as early as the summer to curb spiralling prices.

With inflation far outstripping wage rises, there were also fears of industrial unrest over the summer, with warnings from union leaders that the situation could trigger claims for pay increases.

The financial pressures facing ordinary Scots was calculated by one of the country's leading economists.

Professor David Bell estimated inflation, VAT rises and the forthcoming National Insurance increase would lead to a household on the Scottish average annual income of 29,776 losing 1,340 a year.

"It is simply the consequence of trying to cut the public finances back," he said.

"Spending power will be reduced quite dramatically. This is actually a conservative, lower-level estimate".

The Stirling University professor of economics warned it could take years for consumer spending power to recover. "Spending power will only recover, if the economy recovers, and, in fact, could well level off at this point. That's why we really, really don't want a double dip recession.

"Growth is going to be quite anaemic, so it is possible there could be a double dip. Certainly, we are looking at quite a long time before we get to the level of spend that we had up to last year … we are talking about years."

The UK government's Office for Budget Responsibility has predicted average earnings will rise by only 2.2 per cent, some way behind the inflation rate.

• Analysis: Pushing up interest rates would be a big and unnecessary gamble

According to Prof Bell, rising inflation means there will be a "decrease in real spending power". Consumers will also be hit by the 2.5-point VAT increase that came into force this month.

That is expected to result in inflation breaking the 4 per cent barrier in the coming months.

Given that goods such as food and children's clothes are not subject to VAT and taking into account the fact that some retailers will try to absorb some of the tax rise to remain competitive, Prof Bell estimated that the overall effect of the increase would be about two percentage points.He arrived at his 1,340 estimate by adding the 2 per cent VAT figure and 1 per cent for the rise in National Insurance to the spending power decrease of 1.5 per cent. Taking into account price increases already in the pipeline, it means workers' real spending power will fall by at least 4.5 per cent over the next few months, he said.

Yesterday's figure means inflation has been above the Bank of England target of 2 per cent every month since November 2009. "It is way above the target," Prof Bell said. "The Bank of England must have a serious worry about its credibility. It has not been near its target for months."

So far the Bank has resisted raising interest rates from their historic low of 0.5 per cent in an attempt to tackle inflation. Its monetary policy committee has indicated it believes high inflation is being caused by temporary factors and has argued that raising interest rates would harm the recovery.

But financial experts said they believed the Bank would have to think again on interest rates - a move that would hurt mortgage holders and those paying off loans.

"It's becoming more and more untenable for the Bank of England to maintain its current policy stance," said Philip Shaw, chief economist at Investec. "With inflation likely to rise above 4 percent next month, pressure for action is only going to grow."

STUC general secretary Grahame Smith said: "With prices now running far in excess of pay deals, the living standards of Scotland's workers are being seriously undermined. For those surviving on benefits, the situation is even worse.

"However, with unemployment high and the recovery weakening, it is essential the monetary policy committee holds its nerve and keeps rates at their current level."

Rail Maritime and Transport union leader Bob Crow said the bar had now been raised in this year's pay round, adding: "Our negotiators will factor higher inflation into our pay talks across the UK transport sector. We will not tolerate a situation where our members' standard of living is eroded as a result of the mistakes and reckless gambling of the politicians and the bankers."Chancellor George Osborne said: "We are very clear that the pressure on working families of rising prices is a huge concern for everyone and a huge concern for the government.

"From April, we are going to see an increase in the tax-free allowance that people get on low and middle incomes, which will help many, many people with family bills.

"We also support what the Bank of England is doing in its fight against inflation, and of course we are paying off the nation's credit card, which is absolutely crucial to all this."

According to the Office of National Statistics (ONS), the inflation 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, caused by rocketing fuel prices.

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

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 have unveiled bill hikes in the past two months.

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

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