Rising oil and food prices are the biggest factors that could force the Government to deviate from its fiscal policy, according to the Office of Budget Responsibility.
Giving evidence at a Treasury select committee session today, OBR member Stephen Nickell said rising oil and food prices are the factors that will most influence its inflation forecast.
He said: “The biggest risk to this forecast, and in some sense to the economy, is if oil prices and food prices keep rising faster than the average rate of inflation.”
He added: “If oil prices continue to move up, then inflation will be higher in our forecast and under the assumption, which I think is reasonable, that wages do not adjust to this, then real wages will fall, consumption will fall and growth will be lower.
“That, in some sense, is the worst of all possible worlds because we have higher inflation and lower growth as a consequence of this, which mean the difficulties facing the MPC are of a very high order.”
When asked what options the Chancellor has to stimulate growth in the face of a “constrained” MPC, Nickell said: “He could cut taxes in such a way to offset the increasing oil price, but that would be at a cost to his fiscal plans.”
OBR chairman Robert Chote stressed the Treasury did not try to put pressure on the organisation to steer its forecast, which was published earlier this month, in a particular direction.
Nickell added the loosening of planning regulation announced in last week’s budget would have the greatest impact of all the measures announced.
He said: “In the longer term the issue of planning reform is the item that will have the greatest impact in the longer term but it is not clear how it will materialise and what it will be. You might expect benefits from planning reform, not just for housing but retail, construction.”