Alistair Darling reiterated government pleas for pay restraint yesterday, warning workers against the consequences of demanding inflation-busting wage deals as the cost of living soars.

As startling official figures showed headline inflation surging to its highest rate in 15 years, reaching 3.8 per cent last month, the Chancellor cautioned that excessive pay awards would drive inflation still higher, threatening to trigger interest rate increases.

He said: “Whether you are in the private sector or the public sector, whether you are sitting in the boardroom or working on the shopfloor, we cannot allow inflationary wage increases.”

The Bank of England has emphasised that should the jump in inflation spark inflationary pay awards it may have little choice but to raise the base rate, despite the deterioration in the wider economy.

Yet even as Mr Darling drove home that stark message yesterday, thousands of council workers were preparing to strike over pay. Brendan Barber, General Secretary of the TUC, said: “All they want is a decent living wage. Claims that decent wages will lead to spiralling inflation are wrong.”

The consumer price index measure of inflation rose to 3.8 per cent in June, up from 3.3 per cent in May, and nearly double the Bank of England's inflation target of 2 per cent. The CPI is at its highest since records began in January 1997. Based on historical data before this, inflation was last higher in May 1992.

Food prices rose by 2.4 per cent in June, pushing the annual rate of food inflation to 10.6 per cent, according to the CPI. This is the fastest pace of growth recorded since comparable figures started in 1997. Compared with the retail price index measure, prices last rose this fast in May 1982.

RPI inflation, which includes mortgage and housing costs, rose to 4.6 per cent, up from 4.3 per cent in May. This measure of inflation is commonly used in wage negotiations, raising fears that employees may demand bigger salaries to cover the increased cost of living.

Worryingly for the Bank, core inflation, which strips out the cost of food and fuel, rose to 1.6 per cent, from 1.5percent in May to the highest since last August, signalling that fuel and food inflation may be beginning to pass through to the wider economy, increasing the risk of a wage-price spiral.

Figures published yesterday showed that manufacturers' prices were rising at the fastest pace in more than two decades.

Mervyn King, Governor of the Bank of England, has already said that he expects inflation to rise to more than 4percent this year but economists said that that prediction may be too modest.

Jonathan Loynes, of Capital Economics, said: “There is worse to come, with the headline rate heading for 4.5percent or even 5.0percent by the autumn.” This gloomy data will further dent hopes of rate cuts, with many analysts forecasting that any cut will come next year at the earliest.

However, the inflation threat should be tempered today with the publication of figures that will show an increase in the unemployment figures.

The latest bleak economic news, coupled with worries about America's economy, sent shares in London's blue-chip companies diving by 2.4 per cent. The FTSE 100 closed down 128.5 points at 5,171.9 yesterday, its lowest close for more than three years.

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