The rise in VAT marks the true start of the coalition's "squeeze" on families, the Labour leader, Ed Miliband, said yesterday as business leaders warned of the potential damage of the tax increase to a fragile economy.

Shoppers flooded high streets yesterday, snapping up items such as furniture, electrical goods and kitchens in an attempt to beat the VAT rise, from 17.5% to 20%, which took effect at midnight.

Miliband's attack, made on the campaign trail in Oldham East and Saddleworth prior to next week's byelection, immediately exposed him to an onslaught from Conservative ministers demanding to know how he would cut the deficit without increasing VAT. Under the new VAT rate petrol costs will hit a minimum of £1.20 a litre while the average cost of a pint of beer will puncture the £3 mark for the first time. There were reports last night of queues at some petrol stations as drivers attempted to beat the price rise.

The British Beer and Pub Association (BBPA) said the VAT rise would result in 8,800 industry job losses and even more pub closures as people opt to drink cheap supermarket alcohol instead of going to the pub. The British Retail Consortium said that seasonal sales and promotions to absorb the extra VAT costs would mean that the worst of the increases would not be felt for some time – but also admitted that some retailers had used the increase to boost sales in the short term by encouraging customers to buy early.

More than two-thirds of small firms are expecting the rise to damage their businesses, with more than half planning to pass the increase on to customers, according to a survey by the Federation of Small Businesses (FSB). It said that bigger firms will be better able to absorb the 20% VAT rate while smaller businesses may have to cut back on recruitment to cope.

The FSB called on the chancellor to review VAT when the deficit has been cut and return it to its usual level of 17.5% as soon as possible.

The Centre for Retail Research has said that UK retail sales would plummet by £2.2bn or 3.1% during the first three months of the year as a result of the rise.

Miliband said: "The squeeze starts here. The squeeze designed in Downing Street will come to your street, to the high street, to every street up and down this country. They will be taxing you with higher VAT when you fill up your car. They will be taxing you when you phone home on your mobile. They will be taxing you higher when you go out and get a cup of coffee. And when you pick up a DVD for the kids on the way home they will be taxing you. This is the wrong tax at the wrong time.

"Most people take at least a week to break their new year's promises. This Conservative-led government has begun 2011 breaking the promises they made in 2010. They promised the fuel-duty stabiliser. Fuel prices are now at a record high."

The chancellor, George Osborne, retorted: "VAT is a powerful weapon to tackle debt and if we don't use it then the spending cuts would be over £13bn bigger. When Labour was in government they accepted this, which is why Alistair Darling says he wanted to put up VAT. Now Labour is in opposition, Ed Miliband has shown weak leadership by jumping on the bandwagon of opportunism. The question he faces is this: if you're not raising VAT, where are the extra £13bn of spending cuts coming from? The NHS? Schools?"

Many retailers are expected to delay the new duty as they assess how rivals are setting their prices and old stock is sold off. A spokesman for the BRC said: "We're not expecting the prices of retail to shoot up overnight. For quite a period the effect of the VAT rise will be lost amid the discounts and sales.

"The VAT rise is certainly being used as part of the promotion activity that retailers are involved in. Some are saying they will bear the cost of the rise for people. They are effectively holding prices at the pre-VAT rise level as a promotion.

"Over the next few months there is no question it will put up prices and retailers have been pointing that out as part of their efforts to make people buy."

Analysis by Deloitte carried out for the Times showed that a family with a combined total income of £70,000 would have to pay an extra £10.80 per week in VAT, or about £561 for the year.

But a group of charities – including Barnardo's, Save the Children and Oxfam, warned last night that the tax rise would hit the poorest disproportionately, with some families now having to pay more than £1,600 in VAT each year. It called on the government to spread the pain more fairly by also increasing its levy on banks, which are generally exempt from VAT.

The charities, all part of the Robin Hood Tax campaign, which is arguing for higher bank levies, pointed to research from the thinktank the Institute of Public Policy Research, which found that banks could afford to pay an extra £20bn – which is also more than the £13bn that the VAT hike is expected to raise. A member of the campaign group, Max Lawson, said: "It is deeply unfair that those living in poverty may have to choose between paying their heating bill or giving their child a hot meal, while the bankers celebrate the new year with yet another round of multimillion-pound bonuses."