Home loans and fuel prices are set to soar as inflation climbs

The Bank of England could lift base rates to 6.25 per cent within months after inflation breached its official target once again.

Some experts predict that rates could even top 6.5 per cent, piling further misery on borrowers.

Meanwhile, with oil prices close to a record high, motoring groups warned that the average cost of petrol will reach £1 a litre for the first time.

Homeowners have already borne the brunt of five rate hikes in less than a year. Further increases on top of the current level of 5.75 per cent would trigger a wave of bankruptcies. The inflation figures prompted City traders to take bets that rates will hit 6.25 per cent by the end of the year.

The predictions followed the announcement that the Retail Price Index was 4.4 per cent last month - up from May's 4.3 per cent. The RPI includes mortgage repayments and is seen as the best measure of the cost of living.

Although the Government's preferred measure of inflation, the Consumer Prices Index, fell from 2.5 per cent in May to 2.4 per cent last month, it was still well above the Bank of England's target of 2 per cent and far higher than economists predicted.

It is the 14th month in a row that the inflation target has not been reached.

James Knightley, an economist at ING Bank, said: 'Our best case is for rates to go to 6 per cent in September, but there's a growing threat that the bank will continue tightening after that. If rates hit 6.5 per cent there could potentially be a crash in the consumer sector..'

Malcolm Barr, economist at JP Morgan, also forecast a rise to 6 per cent in September, but added an increase next month could not be ruled out. Meanwhile, the cost of crude oil is soaring to record levels. On Monday it reached $78.40 a barrel, close to the record of $78.64

The AA Motoring Trust believes motorists will see a 4p rise by August. A spokesman said: 'Oil is up 10 per cent and although we've got a good exchange rate to cushion the blow, it is quite likely that the average litre of petrol will rise above the £1 barrier for the first time by the holiday period.

'But the big crunch will come if there is a major hurricane in America. Even if there is no major damage, jittery speculators could trigger more rises.'

The average price of petrol peaked at 98.5p last August, but fell over the winter. A 4p rise would add £2 to the cost of a typical tank of petrol - and £4.39 to the monthly cost for an average family.

The impact of five hikes in interest rates has been severe. Monthly payments on a typical £150,000 home loan are £120 more than in August last year when rates were 4.5 per cent.

The burden of inflation is worst for older people. Gordon Lishman, Director General of Age Concern, said: 'Many older people live on a low, fixed income and struggle to pay inflation-busting bills.

Increases to the basic state pension in recent years have failed to keep pace with the escalating cost of living.

Steep hikes in the price of goods and services such as council tax, energy prices and water rates are leaving many pensioners very short of cash.'

Despite the gloomy predictions, many homeowners are still oblivious to the risk. Research by Mintel has revealed that Britons collectively owe around £100billion more than they realise.

The report warned that people were 'burying their heads in the sand' when it came to debt, with consumers typically owing twice as much on credit cards, loans and overdrafts as they thought they did.

While the average person thinks they owe £5,251 in unsecured debt, Bank of England figures show the actual amount is £10,300.

Around 43 per cent of adults now owe money on credit cards, loans and overdrafts, but only one in five claimed they were worried about the debt they had taken on.

Toby Clark, senior finance analyst at Mintel, said: 'While Britons have a good grasp of their mortgage borrowing, they are wildly under-estimating the amount of money they owe on credit cards and loans.'

The prospect of higher interest rates strengthened sterling, with the pound rising to a 26-year high against the dollar, reaching $2.0422.