BANK of England chief economist Spencer Dale warned yesterday that the near-term UK economic outlook had "weakened very materially".
And, seemingly signalling a further long period of extremely loose monetary policy, he predicted 2012 "should ... be remembered as the year in which inflation fell sharply". His comments came as data from the Office for National Statistics showed annual UK consumer prices index inflation fell from 5% in October to 4.8% in November, as forecast by the City.
A significant downward impact on the annual CPI rate will come next month when the effect of Chancellor George Osborne's hike in value-added tax from 17.5% to 20%, which came into force in January 2011, drops out of the year-on-year comparison of prices.
Mr Dale, while cautioning that "the dark cloud hanging over the other side of the channel is casting a growing shadow over our economy", emphasised the eurozone crisis was not solely to blame for the UK's "disappointing" growth performance in 2011.
He highlighted weak UK consumer spending amid a sharp fall in living standards. Mr Dale added: "To my mind, the surprising weakness in consumption stemmed largely from the sharp pick-up in inflation over the past year, driven by increases in VAT, energy prices ... and other import prices.
"CPI inflation over the past year was significantly higher than we had expected. And, with modest earnings growth, these price increases detracted directly from households' purchasing power, and the impact on the high street was plain to see."
He added: "The weakness in consumption adds weight to the argument that not all of our disappointing growth performance can be laid at the door of the euro crisis."
Mulling the significant deterioration in UK economic prospects in the last three months, he warned: "The near-term outlook has weakened very materially. The MPC's central projection for GDP (gross domestic product) growth in 2012 published in last month's Inflation Report was over 2 percentage points weaker than the corresponding projection a year ago, with much of that markdown happening over the past three months.
"Although the precise reasons why the economy appears to have slowed are uncertain, and we can't rule out some intensification of domestic headwinds, the most likely explanation would seem to be the growing fallout from the euro area as it has lurched from one mini-crisis to another."
Annual inflation on the old all-items retail prices index measure fell from 5.4% in October to 5.2% in November.
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