Britons are heading for a miserable cocktail of soaring unemployment and surging inflation as the credit crunch shows no sign of waning, business leaders say today.

The spiralling price of fuel and food will push inflation to a high of 3.8 per cent this year and keep it above 3 per cent for the next ten months, the CBI said in its quarterly economic forecast, published today.

More than 200,000 people will lose their jobs before the end of next year as the economy slows markedly, the CBI said, driving the number of people out of work to a ten-year high of 1.89 million. This is 50,000 more than the CBI forecast in March.

Building trade workers and those in the financial sector were most likely to be axed as the housing market slump and the credit crunch take their toll.

But Ian McCafferty, chief economic adviser at the CBI, said that other workers such as waiters, bar staff and sales assistants were also vulnerable to losing their jobs as hard-pressed consumers cut back their spending.

“It is very much consumer-facing companies who are at the centre of the downturn,” he said. Beleaguered financial and business services companies have already shed more than 20,000 jobs this year. The escalating rate of inflation will force Mervyn King, the Governor of the Bank of England, into the humiliating position of having to write four letters to the Chancellor to explain why inflation has surged far above the Bank’s 2 per cent inflation target.

The Chancellor must write such a letter when inflation rises by more than 3 per cent, and every three months thereafter until the rate falls back below 3 per cent.

A sign of the misery being endured by households grappling with higher fuel and food bills emerged last week as a survey by the Bank of England showed that consumers felt that inflation had already jumped to nearly 5 per cent.

But as inflation rises, the economy is set to lose steam, with economic growth slowing to a crawl next year, the CBI said. It forecasts that GDP, a measure of economic growth, will slip from 1.7 per cent this year to 1.3 per cent in 2009. This is nearly half the Government’s forecast for growth of between 2.25 and 2.75 per cent in 2009.

“We will avoid recession, but there is a very prolonged period of very sluggish growth in prospect,” Mr McCafferty said.

But two thirds of Britons believe that the country is already in recession, according to a recent survey by the British Retail Consortium. An economy is officially in recession if it shrinks for two successive three-month periods.

There was a ray of light in the CBI’s gloomy forecast as Mr McCafferty said that interest rate cuts could be on the cards before the end of the year. He said that fears that rates would rise were misplaced.

“We continue to believe that the Bank will be able to cut rates as inflation comes down next year,” he said. However, households were dealt a further blow as the prospect of cheaper mortgages in the coming months was dismissed by the CBI.

It said that the credit crunch, the seizure in the credit markets that took hold in the wake of the US sub-prime crisis, was unlikely to abate in the near future.

“We are unlikely to see any serious ungumming of the markets until the end of 2008 or next year,” Mr Cafferty said.

This is bad news for borrowers, who have had to pay much higher mortgage rates this year as lenders pass on the increased cost of securing scarce funding for their home loans. The average rate for a two-year fixed-rate home loan for a borrower with a 5 per cent deposit is now close to 7 per cent, up from 6.05 per cent in May last year, recent figures from the Bank of England show.

Mr McCafferty questioned whether mortgage rates would ever return to the levels seen before the credit crunch, when lenders offered mortgage deals with rates that were close to, or even below, the Bank rate to lure customers through their doors.

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