Families have been warned to expect a sharp fall in living standards as the Bank of England grapples with soaring inflation.

The Bank's governor, Mervyn King, said a dramatic increase in energy bills, rising food prices and dearer imports would push the rate close to 4 per cent before the end of the year.

Mr King added: "As those price increases feed through to household bills, they will lead to a squeeze on real take-home pay, which will slow consumer spending and output growth, perhaps sharply.”

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The Bank added to the gloom by predicting growth could slow to just 1 per cent this year - well below official Government forecasts - as banks hit by the credit crunch tighten up lending and consumers alarmed by falling house prices save more.

Wages are meanwhile unlikely to grow significantly as businesses come under pressure and shed jobs.

The warning came on the day it was revealed unemployment was rising at its fastest rate for two years.

The number of jobless rose by 14,000 to 1.61 million in the three months to March, the Office of National Statistics said today, with the number of people claiming Jobseeker's Allowance climbing by 7,200 to 806,300 last month.

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