Rapid pace of price rises 'embedded', forecaster warns
- Published
The rapid pace of price rises looks like it is becoming entrenched, putting huge pressure on the public finances, the government's forecaster has warned.
A series of shocks to the economy have also "ratcheted up" public debt, the chair of the forecaster said.
Soaring prices are becoming "persistent" and "embedded", Richard Hughes said, prompting the Bank of England to raise interest rates.
That means the UK is having to pay more interest on its public debt, he said.
Public debt is money borrowed by the government over a number of years to fund some of its spending.
Government debt is at its highest level since the early 1960s. Interest rate rises, that are designed to get inflation under control, mean the government is paying more to service that debt than at any point since the late 1980s.
The forecaster, the Office for Budget Responsibility (OBR), was commenting following its report earlier this week pointing to faces growing costs from an ageing society. This puts the government in a "vulnerable position", the OBR said.
Mr Hughes, who chairs the OBR, told the BBC's Today programme that "getting a grip on inflation is really important" in part due the impact on the public finances.
The government has racked up a lot of debt dealing with the financial crisis that began in 2008, followed by the Covid pandemic, and then soaring energy prices, he said.
Inflation - rising prices - can help reduce the real value of a nation's debt.
However, around a quarter of the UK's debt is index-linked, meaning that the interest payments on the debt rise with inflation, Mr Hughes said. Therefore inflation is less helpful to the public finances.
In addition, the Bank of England pumped hundreds of billions of pounds into the economy during the financial crisis and the pandemic in a process called "quantitative easing".
This was "critical to supporting the economy", he said, but it involved buying up lots of long-term debt issued by the government, and replacing it with very short-term debt issued by the Bank of England.
This short-term debt is much more sensitive to rate rises, he said, as it needs to be replaced with new borrowing more frequently.
Another of the pressures on the public finances is public sector pay. The government has just offered more than one million public sector workers, including teachers, police and doctors, pay rises of between 5% and 7%.
But the government has taken the decision to take that money - up to £3bn - out of public sector budgets, rather than increasing borrowing and spending.
Chancellor Jeremy Hunt has set a target for underlying debt to be falling in five years' time. Underlying debt is money owed by the UK government, excluding borrowing by the Bank of England. Mr Hunt said the government would take "difficult but responsible" decisions on the public finances.
Rate rises are also going to push up mortgage costs for households, Mr Hughes added.
On Thursday, the Bank of England said mortgage payments will rise by at least £500 a month for nearly one million households by the end of 2026.
- Published13 July 2023
- Published13 July 2023
- Published2 days ago