The threat of another rapid interest rate rise loomed over homeowners and businesses last night after headline inflation leapt to a 15-year high.

Rising fuel bills and prices on the high street sent inflation on all measures soaring last month, official figures showed.

On the widely-used retail price index (RPI), inflation soared to 4.4 per cent, the highest level since December 1991, when interest rates stood at 10.4 per cent amid the depths of the last recession.

The startling figures helped to explain the Bank of England’s decision last week to raise interest rates to 5.25 per cent, a move that caught the City off guard.

Tony Blair insisted at his monthly press conference that prices were being brought under control. Meanwhile, the Office for National Statistics (ONS) made plain that inflation has drifted farther from its target than at any time since the Bank was made independent in 1997.

On the consumer price index (CPI), the inflation measure tracked by the Bank that excludes housing costs and council tax, prices leapt by a record 3 per cent, a full percentage point above the 2 per cent target set by Gordon Brown.

But Mervyn King, the Governor of the Bank of England, was spared the embarrassment of having to write an open letter of explanation to the Chancellor, which would have been required had inflation been above the 3 per cent level.

Economists gave warning, however, that the CPI could yet rise farther in the next month or so, forcing Mr King to write such a letter.

Inflation is then expected to subside as the big increases in household energy and fuel prices in the first half of last year drop out of the annual figures.

Experts are divided over whether the Bank will decide that another interest rate rise is required, but no one in the City was ruling it out last night. A large number now believe that borrowing costs will rise again before the summer, with some predicting that another increase could come as soon as next month. That would be the fourth increase in seven months. The key factor is likely to be the threat that wages will spiral with the beginning of the main pay bargaining season this month.

Many wage settlements are based on RPI, and the Bank fears that higher prices will become entrenched as workers seek compensation for their rising household costs over the past year.

Prices of goods on the high street have begun to creep up this year after several years of retail price deflation, in a further concern for interest rate setters. The ONS said that furniture prices increased by 11.4 per cent in December, the biggest one-month rise since records began in June 1947.

Another keenly-watched indicator, RPIX, which excludes the cost of mortgage interest payments and was the Bank’s former target measure, climbed to 3.8 per cent.

Until December 2003 the Bank was charged with keeping inflation within 1 percentage point of 2.5 per cent on the RPIX measure. In a symbolic blow, yesterday’s figures mark the first time that RPIX has exceeded the previous 3.5 per cent upper limit, which would have prompted an open letter from the Bank.

With the Chancellor out of the country, it was left to Tony Blair to play down the long-term significance of the inflation rise. “Inflation has risen in most of the major countries because of rising energy prices, rising oil prices, which have doubled, tripled, over the past few years,” the Prime Minister said.

“The underlying position of the British economy, even with the recent interest rate rise, is one of strong economic growth, historically very low interest rates, inflation under control and employment and living standards high.”

But George Osborne, the Shadow Chancellor, said that Britain’s inflation rate was twice as high as the rest of the world.

“What’s worse is that the cost of living is rising even faster for millions of working families,” he said. “Britain is now suffering from the triple blow of rising inflation, rising interest rates and rising unemployment.”

One member of the Bank of England’s rate-setting Monetary Policy Committee stressed yesterday that the Bank would not allow wages to spiral out of control. Andrew Sentance said that higher rates had been necessary to control demand and maintain the Bank’s credibility.

“If inflation is to be brought back to target and remain there, demand needs to be appropriately restrained and expectations of inflation by wage and price-setters must remain consistent with the 2 per cent CPI target,” he said.

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