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Rachel Reeves is facing a £28bn blow from soaring inflation as it pushes up the cost of Britain’s debt payments.

Interest payments on so-called linker bonds, which promise investors returns tied to inflation, are expected to total £28.5bn this year, according to economists.

That is £2bn more than official estimates made in March and four times the forecasts made two years ago.

The warning comes as official figures published on Tuesday are expected to show inflation has risen to 4pc – double the Bank of England’s target.

It will fuel criticism of Britain’s decision to link an unusually high proportion of its debt to inflation. The interest rates on around a quarter of gilts, as UK government bonds are known, are tied to price rises. That compares to around a tenth in the US and France.

Government officials have traditionally focused on long-term borrowing to provide certainty and insulate the nation from interest rate shocks.

But the Chancellor’s recent tax raid and increase to the minimum wage have been blamed for stoking inflation, adding a further burden to the public finances.

Growing debt interest

The Office for Budget Responsibility (OBR) predicted in 2023 that falling inflation would leave the bill on inflation-linked debt at £7bn for 2025-26.

As inflation remained stubbornly high, it upgraded its forecast in March of this year to £26.2bn.

But price increases have continued to accelerate, despite the Chancellor’s commitment to bring down the cost of living for families.

Ruth Gregory at Capital Economics estimates that if the rate of inflation continues to overshoot at its current rate, it is likely to add another £2.3bn to the debt interest bill this year.

That would take the cost of servicing inflation-linked debt to £28.5bn.

Martin Beck, chief economist at WPI Strategy, predicted inflation will outstrip the OBR’s forecasts by a slightly smaller margin, estimating the additional cost at £1.4bn.

The forecasts will be a headache for the Chancellor as she battles to plug an estimated £30bn hole in the public finances ahead of her Budget next month.

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Figures published on Tuesday by the Office for National Statistics showed Britain borrowed £20.2bn last month, the highest on record for any September except for pandemic-afflicted 2020.

Nabil Taleb, economist at PwC UK, said the growing cost of debt interest leaves the Chancellor – and the public purse – vulnerable.

He added: “Higher debt servicing costs as a share of total revenues will leave the public finances more exposed to future economic shocks.”

Mel Stride, the shadow Chancellor, said: “Borrowing is soaring under this Labour government. Rachel Reeves has lost control of the public finances and the next generation are being saddled with Labour’s debts.