MPs are expected to demand an explanation from the Treasury over its strategy after the Bank of England effectively scrapped plans to inject more money into the economy while admitting that inflation may not fall as fast as predicted.
Paul Tucker, deputy head of the Bank, said that the rate of inflation might stay above 3% this year. That compares with previous forecasts that it would probably fall to the official 2% target by the end of 2012. He said the Bank's monetary policy committee (MPC) would "guide inflation back to target in the medium term", but admitted that "in the near term there is considerable uncertainty about the path that it will follow".
Rising food and clothing prices pushed the consumer price index up to 3.5% in March, halting five months of decline from a peak of 5.2% in September 2011.
Only one member of the MPC voted for an increase in the £325bn quantitative easing (QE) programme, according to minutes of last month's meeting. David Miles advocated another £25bn injection of money into the economy, but the other eight members – including Adam Posen, who has been the committee's most persistent advocate for more QE – voted for no change, sending the pound to a 19-month high against the euro. All nine members voted to keep the base rate at 0.5%.
Tucker's comments came before data from the Office for National Statistics (ONS) revealed that living standards were continuing to fall for most workers. While inflation has risen to 3.5%, average pay rises have fallen to 1.1%.
Unemployment fell, however, mainly due to a rise in part-time working. The ONS said that joblessness under the government's preferred International Labour Organisation measure declined by 35,000 in the three months to February to 2.65 million – the first fall since May 2011. The unemployment rate was 8.3%, down by 0.1 percentage points.
But the number of people claiming unemployment benefit is still rising, according to the ONS: the total number of people in receipt of jobseeker's allowance was 1.61 million in March, up by a modest 3,600 on a month earlier.
Youth unemployment, which has been a political flashpoint, also declined slightly, by 9,000 in the three months to February (the most up-to-date figures the ONS provides), leaving a total of 1.03 million 16-to-24-year-olds looking for work. The unemployment rate for this age group was 22.2%, down from 22.3% three months earlier.
However, there was a fresh increase in the number of 18-to-24-year-olds who have been unemployed for a long period. In March, there were 54,700 young people who had been claiming jobseeker's allowance for more than 12 months, up from 49,500 a month earlier.
Average pay across the economy has risen by just 1.1% in the past year, dragged down by weaker City bonuses than a year ago. Excluding bonuses, pay increased by 1.6% – less than half the pace of inflation.
The Treasury had been expecting to reap the benefits of rising consumer confidence by the end of the year, following predictions that wages would begin to increase by more than inflation, which is forecast to remain at 2% during 2013. Higher employment levels are also forecast to support consumer sentiment and help turn around an economy that has barely grown since September 2010.
Economists warned that higher than expected inflation at a time when wages remain subdued could undermine forecasts of recovery in 2013. The Commons Treasury select committee has said that forecasting by the Treasury's watchdog, the Office for Budget Responsibility, which uses Bank of England data, should use a wider range of measures to determine the path of the economy.
The committee said it was upset that forecasts had proved unreliable and needed to to be constantly revised.
