CPI inflation at record 3%

The Consumer Price Index (CPI) annual inflation – the Government's target measure – was 3.0 per cent in December, the highest on record, and up from 2.7 per cent in November, according to the Office for National Statistics (ONS).

The largest upward effect on the CPI annual rate came from transport costs. Prices of fuels and lubricants rose this year, in large part reflecting the increase in fuel duty which came into effect on 6 December.

The average price of petrol increased by 2.0p per litre between November and December this year, compared with a fall of 3.0p a year ago.

Another large upward contribution came from furniture and household goods. Prices of furniture showed their largest month-on-month increase since the start of the official series in January 1997 as retailers raised their prices across a broad range of items prior to the usual January sales period.

A further large upward effect came from recreation and culture, mainly due to changes in the price of computer games, non-fiction books and DVDs.

Large downward contributions came from changes in the price of vegetables and from clothing and footwear, with prices of women’s outerwear falling by more than a year ago due to widespread special offers, particularly on jackets, dresses and trousers.

RPI inflation rose to 4.4 per cent in December, the highest since December 1991, and up from 3.9 per cent in November. Housing costs excluded from the CPI had a large upward effect on the RPI this month, mainly due to the mortgage interest payments component, with lenders passing on the November 2006 quarter point increase in the Bank rate.

A further small upward contribution came from the depreciation component (the amount needed to maintain the dwelling at constant quality). The other main factors influencing RPI were similar to those affecting the CPI.

RPIX inflation – the all items RPI excluding mortgage interest payments – was 3.8 per cent in December, up from 3.4 per cent in November.

As an internationally comparable measure of inflation, the CPI shows that the UK inflation rate is above average for the European Union (EU) as a whole. The provisional inflation rate for the EU 25 in November was 2.1 per cent, compared with the UK rate of 2.7 per cent for the corresponding period.

Commenting on the inflation rate increase, RICS economist Oliver Gilmartin said: "The most recent inflation data has sounded alarm bells amongst central bankers that higher inflation expectations could become embedded unless a firm signal is sent to the market. The worry is that inflation pressures could become more prolonged with the retail price index rising to a 15 year high. Any likely feed through into wage settlements at the start of 2007 will need to be nipped in the bud. Higher rates in 2007 will start to dampen house price growth although a supportive global economy and firm housing demand will maintain house price inflation at 7%. January's surprise interest rate rise is likely to soften new buyer enquiries in the coming months, as was the case in Mid-2004 following four successive interest rate hikes in five months."

Karen Darby, CEO of SimplySwitch.com said: "The rampant increases to both gas and electricity prices have helped push inflation up to this 10-year-high and, for consumers, keeping warm this winter has never been more expensive.

“Wholesale gas prices have fallen considerably in recent months. If energy companies were to act now and pass these savings on to their long-suffering customers, this would significantly reduce household costs and have a positive effect on inflation."