The official measure of inflation showed that prices rose 3.7pc in the year to December, up from the previous month's 3.3pc figure as the soaring cost of oil drove the biggest monthly increase on record.
The figures from the Office for National Statistics mean that inflation, as tracked on the consumer price index (CPI), stayed at least one percentage point away from the Bank’s 2pc target for the whole of last year.
The end of year surge also signalled that inflation spiked above the peak forecast by Bank policymakers – whose central projections were for it to hit 3.6pc in the current quarter – before 2011 even began.
The pick-up in the pace of price rises, which economists thought would come in at 3.4pc, will intensify debate on the Bank’s Monetary Policy Committee over whether to raise rates from their record 0.5pc low to cool the economy.
“Inflation is now certain to move above 4pc in early 2011,” said Simon Ward, chief economist at Henderson Global Investors, while trades tied to the path of interest rates show markets are now pricing in the expectation of a rate hike by June.
The pound shot up more than half a cent against the dollar to an eight-week high over $1.60 as investors were lured in by the prospect of a rate hike offering higher returns.
Meanwhile demand for UK government bonds fell, pushing yields on 10-year gilts – the returns available – up 5 basis points to 3.66pc. Holding money in gilts looks less attractive if interest rates are rising.
UK inflation is being driven up by energy and food prices, as global oil prices near $100 a barrel and crop supply shortages around the world increase demand for food.
These problems remained behind the sudden surge last month, as air fares soared month-on-month and prices for fuels and lubricants jumped 2.8pc – the biggest November to December rise since 1996.
Prices were also pushed up by increasing gas bills as some of the major energy suppliers raised their tariffs.
The worry is that inflation will accelerate further as January’s rise in the VAT to 20pc takes affect and the rising cost of oil keeps feeding through into fuel prices and utility bills.
The Bank of England’s own projections are that a full pass through of the sales tax rise would add 1.4 percentage points to the inflation rate, or 0.7 percentage points even if only half of the effect feed through.
Minutes for the Bank’s Monetary Policy Committee (MPC) meeting last month showed that members noted that inflation could “well reach 4pc by the spring, somewhat higher than the November Inflation Report” in which they laid out their quarterly projections.
Paul Fisher, the Bank’s executive director for markets and a committee member, said in a new interview that the sticky inflation was "very uncomfortable", but that the Bank had to look through the short-term factors pushing up prices, however unpopular that may be.
The MPC policymakers will have had an early estimate of the latest inflation rate to hand when they last week left interest rates on hold for another month.
The Bank is worried about derailing the recovery by raising rates prematurely, but others question whether the higher commodity prices are indeed a short-term phenomenon.
Samuel Tombs, UK economist at Capital Economics, warned that higher energy prices threaten the economy as the feed-through into inflation bites on household spending as incomes do not stretch as far.
"The recent surge in the oil price to just shy of $100 per barrel will act as yet another brake on the UK’s economic recovery this year just as the fiscal tightening is reaching its most intense phase," he said.
Inflation as tracked by the retail price index (RPI), which includes more housing costs and is the benchmark for many wage deals, also picked up, from 4.7pc to 4.8pc - the highest figure since July.
George Osborne, the Chancellor, said on the BBC on Tuesday that rising price pressures were a concern for the government.
"We're very clear that the pressure on working families of rising prices is a huge concern for everyone and a concern for the government," he said.
"We also support what the BoE is doing on its fight against inflation, and we're paying off the nation's credit card, which is crucial to all of this," he added, referring to his deficit-cutting plan that starts in earnest this year.
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