Shoppers have been told to brace themselves for further inflation misery after the cost of living spiralled to a two-and-a-half year high last month.
Figures released yesterday, showed that the annual consumer price measure of inflation hit 1.6 per cent in December, up from 1.2 per cent in November, marking the highest level since July 2014.
Most economists admit that they had not been expecting it to rise so sharply last month.
Forecasters said inflation was likely to increase to more than 2 per cent in January, and could average 3 per cent across 2017, as rising wholesale costs for food and fuel are passed on.
Households are likely to be squeezed by retailers who have so far resisted raising prices on the back of the slide in sterling, but are under pressure to do so.
Howard Archer, chief European and UK economist at forecasting consultancy IHS Global Insight, said: “We see inflation likely moving above its 2 per cent target rate during the first quarter of 2017, rising to 3 per cent in the latter months of this year and peaking around 3.3 per cent early in 2018.”
Mike Prestwood, head of inflation at the Office for National Statistics, said rising air fares and food prices, as well as a shallower fall in petrol prices compared with a year earlier, lay behind the rise in inflation last month.
He added: “This is the highest the consumer price index has been for over two years, though the annual rate remains below the Bank of England’s target and low by historical standards.”
The figures come after Bank of England governor Mark Carney warned that UK consumers faced headwinds this year, with spending taking a hit from rising prices and the weaker pound.
In his first major speech this year, Mr Carney said household debt and rising consumer credit will be a key focus for the Bank’s monetary policy committee as it decides whether or not to raise interest rates in the months ahead. Calum Bennie, savings expert at Scottish Friendly, said: “The worrying rise in inflation to 1.6 per cent puts a figure on what consumers in the UK already know – the cost of buying everyday goods is constantly rising or, as we have seen with the changes to some the nation’s favourite chocolates recently, like Toblerone and Freddo, they are getting less for more.
“Although Mark Carney has hinted that interest rates may creep up to help stem the rising tide of inflation, this is unlikely as the fall in sterling will dampen demand. So savers shouldn’t expect any rise in savings rates soon.”
Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “Though inflation still remains below the government target, there is no doubt that it will exceed this during 2017.
“Inflation is a concern for business as it can damage profitability and suppress growth in consumer demand, which has, to date, been one of the principal drivers of growth in our economy.”