Inflation remains at 2.7%

The rate of consumer price index inflation remained unchanged at 2.7% in December, official figures showed.

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Labour: 'Worrying that inflation remains high'

It's worrying that inflation remains high and prices are continuing to rise so much faster than wages. But instead of easing the squeeze, ministers are adding to the cost of living crisis for people on middle and low incomes.

On top of soaring energy bills millions of families and pensioners will soon be hit by the Government's granny tax, cuts to working tax credit and child benefit while 8,000 millionaires get a tax cut.

– Catherine McKinnell MP, Labour's Shadow Treasury Minister



What is the CPI and how is inflation calculated?

The Consumer Price Index (CPI) measures the average change in the prices of goods and services bought "for the purpose of consumption" in the UK.

The CPI forms the basis for the Government’s inflation target that the Bank of England’s Monetary Policy Committee is required to achieve.

Each month the Office for National Statistics (ONS) gathers over 100,000 prices of goods and services from a range of retailers, including online.

Prices are updated every month with the same retailers visited to monitor identical goods.

These prices are then combined using information on average household spending patterns to produce an overall prices index.

The CPI also takes into account how much we spend on different items giving items we spend more on more weight in the calculation, for example we tend to spend more on fuel than on postage stamps. So a change in fuel price will impact on inflation more than a change in the cost of stamps.

Economist predicts 3% inflation by the summer

Philip Shaw, chief economist at Investec Securities, is pencilling in a rise to 2.9% last month and warned that CPI is heading for 3% by the summer:

This is getting close to the level - above 3% - where Sir Mervyn King or his successor Mark Carney would have to write another explanatory letter to the Chancellor.

We think this is likelier than not to happen, but on our profile we do not expect it until around mid-year

Price increases from four of the "big six" energy suppliers came into effect by the end of December in a winter blow to consumers.

It is thought that this will have been partially offset by lower fuel costs as oil prices have fallen, while food inflation is also likely to be below the 1.4% jump seen a year earlier.

Bank of England Governor due before Treasury Committee

Mervyn King will give evidence at Treasury Select Committee hearing later Credit: David Jones/PA Wire

As new inflation figures are expected to stay well above the Government's target of 2% the Governor of the Bank of England is due to give evidence at Treasury Select Committee hearing on the Financial Policy Committee's November 2012 report.

Ed Davey, the Energy Secretary will also appear before the Energy Bill Committee later today, it is expected that increases in energy bills will have played a large part in the above target inflation figures when they are released.

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