The coming year will see real take-home pay "stagnate" and property prices fall, the Governor of the Bank of England has predicted.
And Mervyn King made clear that the Bank's Monetary Policy Committee (MPC) is prepared to impose increases in interest rates in its efforts to rein in inflation.
A day after writing to Chancellor Alistair Darling to explain why inflation is at 3.3% and could hit 4% this year, Mr King insisted that the MPC is ready to take "whatever action is needed" to return it to its 2% target.
In a speech following Mr Darling's own annual Mansion House address, Mr King echoed the Chancellor's warning that wage rises must be kept in check to control inflation.
Despite acknowledging that Britain faces "the most difficult economic challenge for two decades", he held out hope of a return to lower inflation and healthier growth, so long as the monetary discipline imposed by the MPC is maintained.
Mr King - who recently declared the end of the "nice decade" of low inflation and constant expansion - rejected arguments that, in the current economic slowdown, the Bank's focus should be on spurring growth rather than taming inflation.
"Target growth not inflation is the cry," he said. "I could not disagree more. This is precisely the situation in which the framework of inflation targeting is so necessary. Without it, what should be a short-lived, albeit sharp, rise in inflation, could become sustained."
Although he acknowledged that the main drivers of the current inflation spike were global supply and demand pressures on food and oil, Mr King insisted that action can be taken domestically to put a lid on prices.
"The rise in commodity prices cannot, by itself, generate sustained inflation in the United Kingdom unless we allow it to," he said. "We will not. So although inflation in the UK will rise in the short term, inflation will then fall back."
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Separately, Halifax Bank of Scotland has warned that property prices are likely to fall by 9% this year - a near doubling of previous expectations as the bank predicts deepening gloom for the housing market. The UK's biggest mortgage lender said that the forecast for the property sector will lead to higher bad debt charges, with mortgage arrears levels already rising.
