The number of people claiming unemployment benefits leapt by 20,100 in July, signalling the biggest rise since Britain's last recession in 1992.

The sixth consecutive monthly rise took the claimant count to 846,700, up from 844,000 in June, official figures show.

The number of people out of work, calculated using the alternative ILO measure, rose by 60,000 in the three months to June, the biggest rise since mid-2006, taking the rate to 5.4 per cent, from 5.2 per cent in the first three months of the year.

Total unemployment, including people not eligible for benefit, is now 15,000 higher than a year ago.

While employment was up by 20,000 in the three months to June, the rate of increase has slowed sharply.

Analysts say that unemployment is set to rise even further as job cuts by housebuilders continue to feed through. The construction sector has shed 35,000 jobs since its peak last year. Influential surveys from manufacturers and service companies also indicated that employment is set to fall in these sectors.

Howard Archer, of Global Insight, the economic consultancy, said: "It seems inevitable that extended very weak economic activity and deteriorating business confidence will exact an increasing toll on the labour market over the coming months."

Vicky Redwood at Capital Economics, said tumbling house prices could also hasten a rise in unemployment as confidence suffered.

"It is only a matter of time before the resulting weakness in firms’ revenues results in more widespread job cuts," she said.

But in an encouraging development for the Bank of England, average earnings including bonuses rose by a weaker-than-expected 3.4 per cent in the three months to June, down from 3.8 per cent in the three months to May, signalling that the weakening jobs market is keeping a lid on pay deals despite rocketing inflation. Pay deals excluding bonuses rose by 3.7 per cent, down from 3.8 per cent.

However, while pay rose by a modest 2.8 per cent in manufacturing firms, private-sector pay deals were much higher at 4 per cent, although this was 0.2 percentage points lower than in the three months to May.

Inflation rose to a 16-year high of 4.4 per cent in July, more than double the Government's 2 per cent target and the highest annual rate since 1992.

Prices were pushed higher by the soaring cost of food and fuel.

There were fears that wages could start to rise as workers demanded bigger salaries to cover the increased cost of living, sparkling a wage-price spiral that would serve only to further entrench inflation in the economy as prices and wages pushed each other higher.

Mr Archer said that modest pay agreements in future months were key for future rate cuts. "It is absolutely critical that earnings growth remains muted, if the eventual next move in interest rates is to be down. Any sign that higher inflation and elevated inflation expectations are feeding through to push up pay significantly would add to already significant pressure on the Bank of England to lift interest rates," he said.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts