Soaring inflation could add at least £12bn to the already heavy debt burden weighing on the public finances, possibly crimping Rishi Sunak’s room for giveaways at the upcoming budget.
Higher-than-expected RPI inflation is set to push debt interest payments above official forecasts produced by the government’s spending watchdog.
In its latest official forecasts published in March, the Office for Budget Responsibility predicted RPI inflation would reach 3.1 per cent in the three months to June.
However, RPI inflation breached that forecast and soared to 3.9 per cent.
About a quarter of the government’s stock of debt is linked to RPI inflation, meaning interest payments rise in line with the rate of price growth.
Analysts expect RPI inflation to rise even further, which would swell the government’s debt burden.
Samuel Tombs from Pantheon Macroeconomics sees it to rising to 4.9 per cent in the closing months of the year.
“Our forecast for further above-trend month-to-month increases in the RPI over the next nine months implies that debt interest payments will overshoot the OBR’s March Budget full-year forecast by about £12bn.”