Britain’s government is planning to ramp up public spending — but market watchers warn the proposals risk sending jitters through the bond market further inflating the country’s $143 billion-a-year interest payments.

U.K. Finance Minister Rachel Reeves on Wednesday announced the government would inject billions of pounds into defense, healthcare, infrastructure, and other areas of the economy, in the coming years. A day later, however, official data showed the U.K. economy shrank by a greater-than-expected 0.3% in April.

Funding public spending in the absence of a growing economy, leaves the government with two options: raise money through taxation, or take on more debt.

One way it can borrow is to issue bonds, known as gilts in the U.K., into the public market. By purchasing gilts, investors are essentially lending money to the government, with the yield on the bond representing the return the investor can expect to receive.

Gilt yields and prices move in opposite directions — so rising prices move yields lower, and vice versa. This year, gilt yields have seen volatile moves, with investors sensitive to geopolitical and macroeconomic instability.

The U.K. government’s long-term borrowing costs spiked to multi-decade highs in January, and the yield on 20- and 30-year gilts continues to hover firmly above 5%.

Official estimates show the government is expected to spend more than £105 billion ($142.9 billion) paying interest on its national debt in the 2025 fiscal year — £9.4 billion higher than at the the time of the Autumn budget last year — and £111 billion in annual interest in 2026.

The government did not say on Wednesday how its newly unveiled spending hikes will be funded, and did not respond to CNBC’s request for comment about where the money will come from. However, in her Autumn Budget last year, Reeves outlined plans to hike both taxes and borrowing. Following the budget, the finance minister pledged not to raise taxes again during the current Labour government’s term in office, saying that the government “won’t have to do a budget like this ever again.”

Andrew Goodwin, chief U.K. economist at Oxford Economics, said Britain’s government may be forced to go even further with its spending plans, with NATO poised to hike its defense spending target for member states to 5% of GDP, and once a U-turn on winter fuel payments for the elderly and other possible welfare reforms are factored in.

Additionally, Goodwin said, the U.K.’s Office for Budget Responsibility is likely to make “unfavorable revisions” to its economic forecasts in July, which would lead to lower tax receipts and higher borrowing.

“If recent movements in financial market pricing hold, debt servicing costs will be around £2.5bn ($3.4 billion) higher than they were at the time of the Spring Statement,” Goodwin warned in a note on Wednesday.

Despite widespread fears to the contrary, President Donald Trump‘s tariffs have yet to show up in any of the traditional data points measuring inflation.

In fact, separate readings this week on consumer and producer prices were downright benign, as indexes from the Bureau of Labor Statistics reported that prices rose just 0.1% in May.

The inflation scare is over, then, right?

To the contrary, the months ahead are still expected to show price increases driven by Trump’s desire to ensure the U.S. gets a fair shake with its global trading partners. So far, though, the duties have not driven prices higher, save for a few areas that are particularly sensitive to higher import costs.

At least three factors have conspired so far to keep inflation in check: companies hoarding imported goods ahead of the April 2 tariff announcement, the time it takes for the charges to make their way into the real economy, and the lack of pricing power companies face as consumers tighten belts.

“We believe the limited impact from tariffs in May is a reflection of pre-tariff stockpiling, as well as a lagged pass-through of tariffs into import prices,” Aichi Amemiya, senior economist at Nomura, said in a note. “We maintain our view that the impact of tariffs will likely materialize in the coming months.”

This week’s data showed isolated evidence of tariff pressures.

Canned fruits and vegetables, which are often imported, saw prices rise 1.9% for the month. Roasted coffee was up 1.2% and tobacco increased 0.8%. Durable goods, or long-lasting items such as major appliances (up 4.3%) and computers and related items (1.1%), also saw increases.

“This gain in appliance prices mirrors what happened during the 2018-20 round of import taxes, when the cost of imported washing machines surged,” Joseph Brusuelas, chief economist at RSM, said in his daily market note.

One of the biggest tests, though, on whether the price increases will prove durable, as many economists fear, or as temporary, the prism through which they’re typically viewed, could largely depend on consumers, who drive nearly 70% of all economic activity.

The Federal Reserve’s periodic report on economic activity issued earlier this month indicated a likelihood of price increases ahead, while noting that some companies were hesitant to pass through higher costs.

“We have been of the position for a long time that tariffs would not be inflationary and they were more likely to cause economic weakness and ultimately deflation,” said Luke Tilley, chief economist at Wilmington Trust. “There’s a lot of consumer weakness.”

Indeed, that’s largely what happened during the damaging Smoot-Hawley tariffs in 1930, which many economists believe helped trigger the Great Depression.

Tilley said he sees signs that consumers already are cutting back on vacations and recreation, a possible indication that companies may not have as much pricing power as they did when inflation started to surge in 2021.

Fed officials, though, remain on the sidelines as they wait over the summer to see how tariffs do impact prices. Markets largely expect the Fed to wait until September to resume lowering interest rates, even though inflation is waning and the employment picture is showing signs of cracks.

“This time around, if inflation proves to be transitory, then the Federal Reserve may cut its policy rate later this year,” Brusuelas said. “But if consumers push their own inflation expectations higher because of short-term dislocations in the price of food at home or other goods, then it’s going to be some time before the Fed cuts rates.”