Families were warned last week to prepare for years of stagnant growth in house prices and take-home pay, but big rises in the cost of living, in one of the Bank of England’s bleakest economic assessments for years.

Mervyn King, the Bank’s governor, said that the rate of inflation reached 3% in April and could hit 3.7% by the end of the year because of the soaring cost of fuel and food. This would be well above the Bank’s 2% target and the highest for 16 years. And while the cost of living shoots up, the economy is set to grind to a halt by the autumn with growth of just 0.2% a quarter over the rest of the year.

King said: “For the time being at least, the ‘nice’ decade is behind us. We are travelling along a bumpy road as the economy rebalances.”

House prices are already falling and Halifax said last week that homeowners should be prepared for values to fall until at least the end of 2009 while earnings catch up, enabling first-timers to get back into the market.

Martin Ellis, chief economist, said: “If we were to see a 10% fall in house prices by the end of next year, they would be back at sustainable levels. Even then, homeowners should be prepared for prices to go up less than earnings for several years.”

The combination of stagnant growth and persistent inflation has raised the spectre of “stagflation”, although the economy is still a long way from the double-digit inflation of the 1970s. However, there is plenty to see you through the gloom. Here we look at ways you can protect yourself from the hard times ahead.

Ask lenders to keep back rate cuts

If you set aside the £30 you saved when the Bank last cut rates and used it to pay off debt, you could save £6,080 over the next 10 years. Brokers such as MONEYSCREEN say that it has never been more important to build up a cushion of equity in your property because lenders are increasingly reserving their best rates for homeowners with 10% and sometimes 25% equity.

While you may have sufficient cushion now, that may not be the case in a year’s time if prices fall by around 10% as expected.

Someone with a 25-year £200,000 mortgage on a tracker at 5.63% would have saved £30 last month when the Bank cut interest rates. If you could afford the mortgage before the cut, you could ask your lender to maintain your mortgage at the same level, which would knock £10,081 off your loan over the term and would allow you to repay it 14 months earlier.

www.moneyscreen.co.uk

Invest in coal

Despite the general focus on oil prices, coal is still a significant global player. British Gas says about a third of Britain’s energy is still produced from coal.

The price of coal has soared in the past 12 months from $30 a tonne to $100 a tonne, due largely to the demand from economies such as China.

However, the price of coal-mining firms is still cheap compared with oil firms. Research by M&G, an analyst, shows Exxon’s oil reserves have a similar value, in terms of energy, to the coal reserves of Peabody, the world’s largest non-governmental coal producer. However, while the market value of Exxon is £500billion, the value of Peabody is nearer £19billion.

You can invest in UK Coal, Britain’s largest coal producer. On Friday it was trading at 525p a share, 16% up from the beginning of the year. John Davey of adviser Bestinvest also recommends the First State Global Resources fund, up 47% over a year.

And finally, don’t fill up on Fridays

The national average price of unleaded petrol has risen 4.4p in the last month to 112.2p. Diesel has risen by 6.8p per litre in the same period to 123.6p.

Petrolprices.com , the comparison firm, says many forecourts increase the rate on fuel by 1p just before the weekend.

“Petrol stations put their prices up on a Friday because that’s the day that most people tend to fill up. It won’t save you much money, but at least you are getting back at the oil giants,” said Brendan McLoughlin of Petrolprices.com. The price usually comes down again for the rest of the week.

You can also save by taking advantage of free fuel deals. Fiat is offering £1,000 cashback when you buy its Grande Punto for £7,500-£13,500 until June 30. The deal has also been extended to the Fiat Sedici, a 4×4, which costs between £13,000 and £15,840