The rise will put further pressure on the Bank of England to lift interest rates to curb rising inflation.
The recent VAT rise from 17.5% to 20% could further fuel inflation, which has now remained above the 2% target by one percentage point or more for 13 months.
The Office for National Statistics said the biggest drivers of inflation were air transport, fuel, utility bills and food costs.
Fuel prices increased at their fastest annual rate since July, while the cost of food showed its biggest annual rise since May 2009.
Jonathan Samuels, CEO of Drawbridge Finance, said: "The odds on an interest rate rise in the first half of the year shortened considerably on the back of 3.7% inflation. If this rising trend continues for much longer, it will be very hard for the Bank to justify keeping interest rates at their current level.
"There comes a point when rates simply have to be raised, irrespective of the danger of undermining the recovery. The property market is already facing downward pressure from weak demand and the now very real threat of higher interest rates in the next few months will accentuate this.
"2011 is shaping up to be an extremely tough year for the UK property market."
Christina Weisz, a director of foreign exchange specialists, Currency Solutions, added: "The higher than anticipated inflation figure, demonstrating the fastest pace of price growth in seven months, resulted in an instant spike in Sterling against a basket of currencies as the likelihood of a rise in Bank Rate increased. Within a minute of the announcement, GBP/Euro jumped from 1.1905 to 1.1960.
"Inflation has now remained above the 2% target for 13 months and the VAT increase earlier this month is likely to add further inflationary pressures, making an interest rate rise more imminent. This will add strength to Sterling, both in the short- and potentially medium-term."
And Julien Holmes, chief operations officer of Crown Mortgage Management, said: “With inflation as persistent as it is, it is hard to justify keeping rates as low as they are."
Holmes said that the Bank of England had a clear credibility issue and if they didn't do something soon, inflation expectations would just keep trending up.
"Down the road, that would mean a more drastic adjustment," he added. "The current rate is based on the idea that there is plenty of spare capacity in the economy which will keep inflation in check. But the MPC must now ask itself whether this can really be the case if inflation keeps going up.
"We may well be much closer to full capacity than we realise and if this is the case, inflation will begin to spiral unless rates rise soon. High inflation is dangerous for a number of reasons, but most pressing for homeowners is that a loss of credibility in those managing the economy means the rates on UK government bonds will increase. If bond rates increase, so will the cost of mortgages and the benefits of a low Bank Rate would be lost.”
