Householders feel the squeeze as cost of living rises

Soaring costs of food, fuel and mortgages have left Bank of England policymakers waging a constant war on inflation this year.

And with at least one of the items an essential necessity, virtually everyone else has been on the front line too.

The pressure has seen the all-important cost of living index rise above the government's 2% target for most of the year.

Petrol and diesel prices have been the main offenders, thanks to a host of economic woes, unfortunate accidents and government policy.

A litre of unleaded rose from an average of 87.5p at the start of the year, to 102.7p this month.

The situation was even worse for diesel car drivers, with the fuel ending the year close to 108p, a rise of just under 16p a litre during 2007.

Uncertainty over the situation in the Middle East, insatiable demand from China and other developing economies have all played a part in the rises.

Fuel speculators taking advantage of rapidly increasing prices have also helped to push up prices, with a 2p fuel duty rise imposed by the Treasury in October hitting home too.

And if that was not bad enough, in November oil prices jumped briefly around 5% after a major fire at Coryton Refinery in Essex.

Production at the site, which handles nearly a quarter of the UK's petrol and diesel forecourt demand, was severely disrupted by the blaze.

AA spokesman Luke Bosdet said drivers were reaching breaking point, demonstrated earlier this month with the threat of fuel protests by hauliers.

He said: "For the vast majority of people, they have to get on with it as they have no option but to drive.

"They have got to get to work, got to get to the shops, and see their relatives.

"But we are beginning to see a breakdown of tolerance in certain sectors."

Mr Bosdet added: "The response of the UK consumer is to scale back somewhere else in the family budget - normally in entertainment and leisure.

"And I think you are seeing evidence of that with large price cuts on the high street."

There may be no short term respite next year, with a further 2p duty rise scheduled for April.

The second whammy this year has been a big rise in mortgage costs.

Interest rates have spent much of the year pegged at 5.75%, their highest level since 2001, and up from 5% at the start of the year.

More than 1.1 million homeowners are estimated to have come off two-year fixed rate mortgages during 2007, facing an unavoidable "rate shock" of up to 1.5%.

Industry body the Council of Mortgage Lenders said for the average loan of  £114,000, this would cause a monthly repayment rise of about £102 a month - equivalent to £1,224 a year.

A recent Bank of England survey found that more than a fifth of people who came off fixed-rate mortgages this year have found it hard to meet higher repayments.

And it eventually became a political issue when Conservative leader David Cameron urged banks and building societies to help ease the burden on home-owners facing rate rises.

He said 1.4 million people would be facing a similar rate shock next year, paying up to £200 a month more.

Rising food prices have been the consumer's other main adversary.

Surging costs of basic commodities such as wheat, coffee and milk helped push annual food inflation to 6.6% in the year to November - the fastest rate of increase since July 1993.

In the summer confectionery giant Cadbury warned the price of its chocolate would have to rise to cater for more costly milk.

Cadbury said a 20% increase in milk prices - partly due to bad weather - would leave it £30 million to £40 million worse off.

Coffee prices have risen 10% during the year, according to the International Coffee Organisation.

Howard Wheeldon, an analyst at BGC Partners, said although oil price rises were the big story of 2007, spiralling food inflation could well take its place next year.

He said: "We love it, we eat it but the problem is that we just don't grow enough of it to meet changing demands and to feed the ever rising and seemingly richer global population.

"We are using more of the world's natural resources than can either be sustained or replaced and the result can only be the simple economics of supply and demand meaning food and most other raw material and commodity prices will continue to rise.

"This will play havoc with those such as the Bank of England that must base interest rate decisions on inflation and it reduces the chances that rates can be cut to stimulate economic growth."

Mr Wheeldon added: "It can in my view only get worse and we should get used to the fact that serious levels of food price inflation will be with us for years."