There is an increasing risk of "stagflation" in the British economy, with a combination of rising wage inflation and a slumping manufacturing sector, a report said today.

In its latest twice-yearly forecast, think-tank Oxford Economic Forecasting said that following the Bank of England's June rate hike, there was every possibility of further monetary tightening, increasing the risk of a "hard landing" for the already slowing economy.

It said that while the bank's Monetary Policy Committee (MPC) was worried about strong average earnings growth, much of the recent strength was due to seasonal bonus payments.

"If dismal growth prospects were to trigger a labour shake-out in manufacturing, wage costs would moderate very quickly," it said.

The MPC has also expressed concern that if the pound fell fast from its current level of around three deutschmarks, inflationary pressures could increase.

"Again, it is important to keep such risks in perspective," said Oxford Economic Forecasting.

"It would be wrong for the MPC to raise rates to defend a pound under pressure because of weakening economic growth."