Monday 19 July 2021 7:57 am | Updated: Monday 19 July 2021 9:53 pm

Surging inflation to add £10bn to government’s debt burden

Surging inflation is likely to add £10bn to the government’s debt burden, putting further pressure on the UK’s public finances.

Around a quarter of the government’s stock of debt is linked to the retail price index, meaning the Treasury needs to increase interest payments to savers if prices rise.

The government is on the hook for around £460bn of inflation-linked debt, highlighting the scale of extra money Rishi Sunak will have to find if inflation continues to surge.

Prices in June increased 3.9 per cent annually, but analysts expect the RPI to rise further as the severe supply and demand imbalances across the global economy pushes up costs.

Analysts at investment banks including Barclays and Bank of America expect RPI to reach at least 4 per cent this year.

The Office for Budget Responsibility, the government’s fiscal watchdog, predicts RPI will hit 3.1 per cent in the second quarter of this year.

Martin Beck, senior economic advisor to the EY Item Club, said: “What had been a brighter outlook for the public finances now faces a threat from rising inflation and the risk that interest rates might rise sooner than expected.”

The news was first reported by The Telegraph.