Bank of England boss Mervyn King has said Tuesday's grim GDP figures serve as a stark reminder that Britain's recovery will be "choppy" as he braced consumers for a bleak year ahead.
In a speech at Newcastle's Civic Centre, the Bank Governor warned Britons to expect inflation to rise to between 4 per cent and 5 per cent over the next few months.
Real wages will plunge back to 2005 levels as prices soar and the Government's deficit-busting actions take effect, he added.
While the economy was "well placed to return to sustained, balanced growth", Mr King outlined strong headwinds facing the economy in 2011.
Rising unemployment and declines in real earnings will hit spending in the private sector, with the public sector hammered by Government spending cuts.
But it was inflation that was the Governor's biggest immediate headache.
There have been calls for action after inflation rose to 3.7 per cent in December, far higher than the Bank's 2 per cent target.
Tuesday's GDP figures will have taken some of the heat off the Bank to increase rates, but they also highlight the difficult situation faced by policymakers.
With the economy veering dangerously close to stagflation, the Bank is hampered in its ability to address either growth or inflation without making the other worse.