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Inflation remains at 2.7% with hike on the cards

Inflation remains at 2.7% with hike on the cards

Inflation remained unchanged at 2.7% in December, official figures have shown, with rising energy prices keeping the squeeze on consumers.

Energy providers' hikes to gas and electricity bills kept the government’s preferred consumer prices index (CPI) measure of inflation at 2.7% annually, according to the Office for National Statistics.

The broader Retail Prices Index (RPI), which unlike CPI includes housing costs such as mortgage interest payments and council tax, rose from 3% in November to 3.1%.

Many economists now expect inflation to climb back up to 3% in the coming months. Mervyn King would then have to write another letter to chancellor George Osborne explaining what the Bank of England will do about rising prices.

'It still looks very possible that increased energy tariffs and higher food prices could push consumer price inflation up to 3.0% early in 2013 and keep it there for a while,' commented IHS economist Howard Archer after today's data release.

UK CPI 12-month percentage change (source: ONS)

Today’s data comes amid growing concern that the UK faces a ‘triple dip' into economic contraction in the current quarter, following on from the 1% GDP growth in the third quarter.

Bank of England governor Mervyn King is among the doomsayers, warning at the end of last year that output would ‘fall back sharply’ this quarter.

Nonetheless, the Bank earlier this month voted against re-booting its multi-billion pound stimulus programme.

So far the Bank has pumped £375 billion of new money in to the economy in the past three years, while keeping interest rates at a record low of 0.5%.

The Bank has been criticised for failing to keep inflation below its target, with King last year admitting for the first time that more leeway is needed to let the inflation rate drift away from 2.0% in order to take action to avert financial crises.

The debate over the trade-off between economic growth and inflation has been fuelled by well-publicised comments from incoming Bank of England governor Mark Carney that central banks should consider scrapping their inflation targets and replace them with a target for economic growth.

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