Without a credible and transparent medium-term fiscal plan, bond markets will continue to price in higher risk and demand higher returns, says Gareth Davies

The UK economy faces an uncomfortable reality. On one side, inflation has continued to rise. On the other, government borrowing costs have surged, with gilt yields now at their highest level in almost three decades. Taken together, these developments reflect a climate of uncertainty that investors and policymakers alike will find increasingly difficult to ignore.

The latest data from the Office for National Statistics shows that CPI rose by 3.8 per cent in July, up from 3.6 per cent the previous month, and is expected to reach four per cent in September. The drivers were largely concentrated in transport and services, with airfares jumping more than 30 per cent in a single month, the steepest July increase since records began in 2001. Food and non-alcoholic beverages also saw prices accelerate at an annual rate of 4.9 per cent, the highest in over a year. While housing-related inflation eased slightly, broad-based price pressures persist across the economy.

At the same time, the gilt market is signalling its concerns. Thirty year yields have risen above........

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