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The reversal in the VAT reduction last month has seen inflation rocket to 3.5% in January - its highest level since November 2008.

The Office for National Statistics' latest monthly inflation report shows that the rise in Consumer Prices Index (CPI) inflation came on the back of the soaring cost of alcohol, tobacco, hotels and restaurants after the Government raised VAT tax back up to 17.5%.

The 14-month CPI high triggers an open letter from the Governor of the Bank of England Mervyn King to the Chancellor. The central bank boss must write to the Chancellor whenever CPI hits more than 1% above or below the 2% target.

Commenting on the ONS figures, John Dowson, Head of Policy at the Derbyshire and Nottinghamshire Chamber, said: "The Bank of England's Monetary Policy Committee (MPC) must not over-react to the current inflationary threat by raising interest rates in the short-term.

"The British economy is still weak, trading conditions remain challenging and businesses continue to experience numerous pressures, but it would be wrong for the MPC to contemplate a hike in rates at this time.

"A significant proportion of businesses* believe that slashing the UK's huge  deficit should be the Government's number one priority and  maintaining the current position on interest rates would make it easier for the Chancellor to present a more detailed plan for cutting the massive shortfall in next month's Budget."