Paul Johnson, the IFS’s director, added that take-home pay for the average earner will fall by around 1pc or £180 a year in real terms as inflation takes a “significant swipe” out of incomes and tax rises loom in April. He added: “Large swathes of the population face a squeeze on living standards over the coming year.”

The OBR warned inflation would hit household incomes until late 2023 and added that a 20pc rise in oil prices and a 50pc rise in wholesale gas costs since the watchdog completed its forecasts could mean even higher inflation of “close to 5pc”, it added.

The Bank insists the spike will be temporary, but the OBR added that more persistent pressure driven by energy costs and wage demands could push the CPI all the way to 5.4pc, a level not seen for 29 years. Under the OBR’s main scenario, inflation will stay above the Bank’s 2pc target until at least 2024.

‘Inflation is eating away at nominal wages’

Richard Hughes, the OBR chairman, said: “Real household disposable income per capita is not recovering to its pre-Covid level until the second half of 2023, so you are seeing stagnation in household disposable incomes over the next few years.

“Most of that is inflation. Some of it is taxes and benefits, but the lion’s share is the fact that inflation is eating away at nominal wages over the next few years.”

The inflation squeeze overshadowed predictions of the fastest spurt for the British economy this year since the “Barber Boom” in 1973 as the OBR forecast growth of 6.5pc, clawing back the ground lost to the pandemic by the turn of the year, six months earlier than previously thought.

Financial markets are also betting on the first rate rise from the Bank in three years next week amid increasing nerves among policymakers over inflation, adding to the pressure on households with variable rate mortgages.