Yahoo Finance Sunak faces £5bn jump in debt interest as inflation surges towards 30-year high
Surging inflation is expected to add an extra £5.4bn to the Chancellor's debt interest bill next year as markets brace for the retail price index to hit a 30-year high.
Economists at Citi expect the RPI measure of inflation to run at around 6pc next year for months, as energy prices rocket and supply shortages bite - a full percentage point higher than the Office for Budget Responsibility forecast a month ago.
Around one-quarter of the Government’s £2.2 trillion national debt is in bonds linked to RPI, and this one point rise will equate to an extra net cost for the Government of £5.4bn.
It indicates the Government will spend around £45bn next year on servicing the debt, compared to the £39.9bn forecast by the OBR.
The official forecaster had already put up its debt interest predictions because of higher inflation, adding £13.8bn to the bill for this financial year and £10.3bn for the next one. The latest RPI predictions indicate this will have to rise again.
Citi predicts RPI inflation will peak at 7.1pc in May 2022, a month after the energy price cap on consumer bills is adjusted to take account of higher wholesale energy costs.
This will be the highest since 1991 when RPI was on its way down from a peak of almost 11pc in 1990.
Rising inflation means there is pressure on the Bank of England to act by raising interest rates.
Threadneedle Street kept the base rate on hold at a record low of 0.1pc last week, and markets now anticipate a move in December or February to 0.25pc.
Developments in energy markets will be critical. Markets anticipate a drop off in prices next year as prices stabilise.
George Buckley, economist at Nomura, predicts wholesale energy prices will force another jump in household bills next April. Prices will then rise at a slower rate later in the year.
When it comes to consumer price index inflation, for which the Bank of England has a 2pc target, Mr Buckley predicts a peak of 5pc in April followed by a drop to 2.5pc by the end of 2022 and a fall to 1.1pc by April 2023 as energy prices inflation fades.
