A surge in debt costs - pushed up by soaring inflation to twice their previous monthly peak - added to Britain’s budget deficit in June, which was its highest since April 2021, data showed on Thursday.

The Office for National Statistics said public sector net borrowing excluding state-owned banks rose to 22.879 billion pounds ($27.4 billion) last month from 12.560 billion pounds in May. A Reuters poll of economists had pointed to a deficit of 23 billion pounds.

The figures showed Britain racked up debt interest of 19.4 billion pounds in June alone, more than double the previous record.

The ONS said the leap in debt costs reflected a big April increase in the retail price index gauge of inflation, which is the benchmark for index-linked government bonds.

The uplift applied in June to these linkers - which represent roughly a third of the stock of British government bonds - was 16.7 billion bounds.

Over the first three months of the 2022/23 financial year starting in April, Britain has borrowed 55.4 billion pounds.

While this is 5.7 billion pounds less than over the same period last year, it represents a roughly 3.6 billion pounds overshoot versus forecasts made in March by the Office for Budget Responsibility watchdog.

The OBR warned that with inflation expected to peak even higher than previously thought, further spikes in debt spending were on the cards.

“With several external forecasters now predicting that the CPI measure of inflation could reach 12% in October - over 3 percentage points higher than the peak in our March forecast - further significant upside surprises in debt interest spending can be expected through the year,” the OBR said.

Ruth Gregory, senior UK economist at Capital Economics, a consultancy, said the overshoot of the deficit compared to the OBR’s forecasts “may limit the ability of the next Prime Minister to provide more relief for households.”

The balance between tax and spending has been hotly debated between the two remaining candidates in the race to replace Boris Johnson as prime minister.

Foreign Secretary Liz Truss has promised immediate tax cuts, something the other contender, former finance minister Rishi Sunak, says risks fuelling inflation.

In response to the data, finance minister Nadhim Zahawi said he recognised there were risks to the public finances, including from high inflation which struck a 40-year high last month.

Surging petrol and food prices last month pushed British inflation to its highest rate in 40 years, according to official figures that bolstered the chances of a rare half percentage-point Bank of England interest rate hike next month.

The Office for National Statistics said annual consumer price inflation rose in June to 9.4 per cent, the highest since February 1982, up from May’s 9.1 per cent and above the 9.3 per cent consensus in a Reuters poll of economists.

The latest increase means Britain had the highest rate of inflation seen in any Group of Seven advanced economy since 1985, although many smaller European Union countries are currently seeing even faster growth in prices.

Wednesday’s data bolstered bets that the BoE will opt for a 50-bps rate hike next month, which would be the biggest since 1995. The European Central Bank is considering such a move this week, sources told Reuters on Tuesday.

BoE Governor Andrew Bailey on Tuesday said that scale of borrowing costs increase was on the table but not “locked in”.

The BoE has raised rates five times since December as it tries to stop the surge in inflation from becoming embedded in Britain’s economy, and it is expected to increase them again on Aug. 4. “Soaring inflation means that momentum for a half-point interest rate rise in August is growing,” Suren Thiru, economics director of accountancy trade body ICAEW, said.

“However, tightening monetary policy too aggressively increases the risk of recession and will do little to address the global factors driving this inflationary surge.”

Investors now see an almost 100 per cent chance of the BoE raising the Bank Rate to 1.75 per cent from 1.25 per cent next month. It said in June that it was ready to act “forcefully” if needed.

The ONS said core inflation in June fell to 5.8 per cent from 5.9 per cent in May, in line with the Reuters poll median forecast, which could reassure BoE rate-setters who might be reluctant to hike rates more aggressively.

The ONS pointed to a 42 per cent year-on-year rise in petrol prices and an almost 10 per cent increase in food prices as the main drivers of inflation last month, a hammer blow for families on low incomes.

The Resolution Foundation think-tank said inflation for this group had already passed into double digits.

The cost-of-living crunch has triggered a wave of industrial action by trade unions and been hotly debated among the three remaining candidates in the race to replace Boris Johnson as prime minister.