UK inflation reaches 3.5% as national debt tops £3tn before Budget

The latest economic figures have increased pressure on UK chancellor John Healey before next week’s Budget statement. Inflation has reached 3.5%, while national debt has exceeded £3tn for the first time.

Government borrowing is ahead of forecasts as spending and debt-servicing costs rise. Higher fuel prices have pushed up headline inflation, while increases in airfares and computer game downloads point to wider price pressures.

Inflation forecast above 4%

Capital Economics expects the main inflation measure to peak at 4.2% next year. The Bank of England monitors services and core inflation, and their increases have raised the likelihood of an interest-rate rise next month.

Services include areas such as law, banking, retail, hospitality and tourism, and account for most of the UK’s economic output.

Benefits linked to September inflation

September’s consumer price index determines April uprating for benefits including personal independence payment and carer’s allowance. Under the triple lock, the state pension will rise by 3.9% next April.

Higher inflation while tax thresholds remain frozen could increase tax receipts in cash terms, but it will also raise the cost of public services and could contribute to union pay demands. Food-price inflation has remained largely insulated from the energy shock described in the figures.

North Sea announcement before Budget

On Wednesday, Healey travelled to north-east Scotland to announce new North Sea energy approvals. The decision on the Jackdaw gas field is viewed as the beginning of a series of pro-growth announcements before the Budget.

UK borrowing costs have also risen alongside those of most advanced economies. A narrower gap with other G7 countries and the IMF’s positive assessment of planned borrowing reductions provide some support, but the latest figures show how difficult those plans will be to deliver.