Inflation and rising oil prices remain the two biggest threats to the UK’s economic recovery, as a leading economist said he was “not at all confident about the strength of recovery”.
Figures from the Office of Budget Responsibility (OBR), which was set up by the Chancellor George Osbourne to provide economic forecasts, suggest that inflation will exceed expected salary increases until the middle of 2013.
The OBR also expects wages to rise 2% on average this year, however the cost of living will rise by more than 5%. Sharp rises in food and petrol costs are also set to continue in 2012.
The OBR said that one possible scenario developing from high inflation would be a twelvefold rise in interest rates to up to 6%, putting further pressure on households.
Stephen Nickell, a member of the OBR’s main steering committee, said future growth depends on consumer confidence returning in the UK and household consumption picking up.
As long as wages are rising faster than inflation, "you would expected a lot more consumption", he said. "That explains most of the [increase in] growth."
However, Bank of England chief economist Spencer Dale yesterday revealed he was “not at all confident about the strength of recovery” in the UK economy.
He said: “In particular, I’m not at all confident about the strength of the recovery. My central view...is that growth is likely to be close to its average historical rate over the next few years.
“But that is a pretty disappointing outlook given the depth of the recession from which we are recovering. And there is considerable scope for growth to surprise to the downside, particularly if households retrench further.”
The latest stark forecasts on the economy come after consumer confidence fell to a record low in February due to fears about job security, inflation and the "sluggish" economic recovery, according to research by the Nationwide.
The building society's Consumer Confidence Index dropped 10 points during the month to stand at 38, the lowest level since the survey of 1,000 people was launched in May 2004.
A year ago the figure stood at 82.
