Chancellor Alistair Darling today called for restraint over wage rises and admitted the UK is facing a "difficult year" as he prepared to face City leaders in his first Mansion House speech this evening.

The Chancellor told the BBC's Today programme: “Inflationary pay rises would be disastrous not just for the country but for each and every one of us.

“We cannot allow inflation to become embedded in this country as we allowed it in the 1970s, 80s and 90s.”

There are fears that a pay deal agreed overnight with striking Shell tanker drivers could set a benchmark for pay settlements this year and encourage more industrial action among workers.

Details of the pay deal with the tanker drivers are yet to be announced but workers had been seeking a 13 per cent pay increase after turning down a 7 per cent rise.

Mr Darling said today: "There is no doubt our economy is slowing down," and he is expected to outline the challenges facing the City as the credit crunch continues and economy slows during his speech at Mansion House tonight.

Both Mr Darling and the Bank of England Governor, Mervyn King, will address the City at Mansion House, just a day after both exchanged letters over inflation which rose to 3.3 per cent in May.

Mr King revealed in his letter, explaining why inflation was more than 1 per cent over the Government's 2 per cent target, that the Consumer Price Index will reach over 4 per cent this year.

Mr Darling said yesterday: "'We have got to be vigilant to all pay, public and private alike, because if we get into that spiral it will take years to get out of it.

He blamed rising inflation on increasing food and fuel costs, adding: "We don't want to do anything to exacerbate the situation."

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