The UK economy will grow next year at its slowest rate since 1992, the CBI has forecast.

In its latest quarterly economic outlook, the CBI cut its predicted rate of GDP growth for 2009 to 1.3 per cent, a fall of 0.4 per cent on its previous forecast.

Consumption growth, the CBI said, would be down to 0.7 per cent, its lowest mark since 1992 when it stood at 0.5 per cent.

The sluggishness of the economy and the downturn in consumer spending were blamed in the report on rising fuel and commodity costs.

It is just those rising costs that, the CBI said, will see inflation climb as spending slumps. The consumer price index rate of inflation is expected to exceed 3 per cent for the rest of 2008, peaking at 3.8 per cent in the last quarter of the year, and hovering over the 3 per cent mark until the end of the first quarter of next year.

However, the CBI said it believed that inflation would continue to fall throughout 2009, as the economy slows and wage settlements remain modest, allowing the Bank of England at last to cut the cost of borrowing.

Richard Lambert, the CBI’s director general, said: “Over the past year, the CBI has consistently had to revise down its forecasts for economic growth. The main reason is that the oil price - measured in depreciated sterling - has continued to rise strongly, roughly doubling since the spring of 2007. This has squeezed household incomes and companies’ profit margins, and has also made it much harder for the Bank of England to cut interest rates in the face of the economic slowdown.

“Our best bet is still that there will be a measure of economic growth in 2009. But the outlook has deteriorated in recent months, and considerable uncertainties remain.”

But Mr Lambert went to say that the forecasts did not suggest that the economy is about to enter recession: “Back in the early 1990s, we had a prolonged period of plummeting consumer demand and there were large job cuts across the board. These days, firms are leaner and more efficient and our economy’s reach is far more global. We should avoid believing a recession is inevitable, or talk ourselves into unnecessary trouble.”

There are some bright spots in the CBI analysis. The competitive strength of the pound will boost exports, while imports will be curtailed by weak consumer demand. The gain in net trade should help support the economy.

Ian McCafferty, the CBI’s chief economic adviser, said: “The twin effects of slowing demand and rising commodity prices provide a wind chill factor and will make things feel much less comfortable over the next two years.

“The impact of the credit crunch on economic activity is unravelling much as we had expected, with most firms so far relatively unaffected. Credit markets have been somewhat calmer in recent months, but if significant disruption were to erupt again, then we would see more problems ahead.”

Mr McCafferty added: “Demand has already slowed this year and the extent to which consumers will rein in their spending will be felt most later this year, as they contend with the ongoing squeeze to real incomes and a weaker housing market. Growth should still pick up towards the end of next year but only at a gradual pace, so the economy will feel more sluggish than it has for many years.”