03 July 2008
Soaring world oil prices mean that Britain faces a year or more of lower living standards, the new deputy governor of the Bank of England has warned.
Oil prices - already at a record high - could continue to rise for another two years, the Bank's former chief economist, Charlie Bean, said.
Giving evidence to the Commons Treasury Committee, he warned that if workers tried to compensate by pushing up wages there was a danger of a pay-price spiral developing.
"It certainly poses a significant challenge," he said. "It may be a relatively unlikely event but it could be particularly unfortunate if it happened, if households and businesses start losing faith in the idea that inflation will stay low, they start building it into their pay and prices and inflation becomes much more embedded into the system."
Mr Bean said there was little the Bank or the Government could do to prevent the fall-off in living standards.
"It is determined by global factors. As a nation, it means that our living standards will be lower than they would otherwise be," he said.
He warned that real living standards would have to grow less rapidly this year, and possibly into next year, than was the case in the late 1990s and early 2000s.
"There is not very much that we can do about that as a nation unless we improve our productivity to offset it," Mr Bean added.
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