UK inflation climbed to 3.5% in September, its highest rate in almost a year, as soaring petrol prices and renewed pressure on underlying costs increased the likelihood of a Bank of England interest-rate rise next month.
Consumer prices rose 3.5% annually, compared with 3.1% in August, the Office for National Statistics said on Wednesday. Core inflation accelerated to 2.8% from 2.6%, while services inflation increased to 3.7% from 3.4%.
The figures leave policymakers facing a difficult choice: contain a spreading inflation shock or risk adding to the strain on households already paying more for fuel and borrowing.
Petrol surge puts more pressure on household budgets
Motor fuel inflation reached 29.8% in September, up from 23% in August. Petrol averaged 169.5 pence a litre, the highest since August 2022, while diesel reached 192.5 pence, its highest since July that year.
Transport inflation accelerated to 6.6% from 4.6%, making it September’s biggest inflation driver.
Higher pump prices hurt households immediately. They also raise distribution and operating costs for businesses, some of which may eventually be passed on to customers.
Researchers led by Huw Dixon at the National Institute of Economic and Social Research warned that inflation could reach 5.4% in early 2027 under its intermediate energy-price model.
That is a scenario, not a consensus forecast, but illustrates how a prolonged oil and gas shock could keep prices rising.
UK inflation: Bank of England faces a tougher November decision
Bank Rate remains at 3.75%. In September, six policymakers favoured leaving rates unchanged while three wanted a quarter-point increase.
Before Wednesday’s figures, 54 of 63 economists surveyed last week expected a November rise to 4%.
Tuesday’s labour-market report added to the case for tightening. Unemployment unexpectedly fell to 4.7%, while regular pay grew 3.7% in the three months through August.
Bank policymaker Megan Greene argued that economic resilience may mean less spare capacity to contain wage-driven inflation than previously assumed.
Waiting for conclusive evidence of persistent wage and price pressures, she warned, could leave policy responding too late.
Governor Andrew Bailey has offered a more cautious interpretation. In comments reported by the Financial Times last week, he said firms were still largely absorbing energy costs rather than passing them on, although prolonged pressure could change that behaviour.
Higher borrowing costs threaten to compound the squeeze
A November hike would come at a difficult time for consumers. More expensive fuel leaves less room for discretionary spending, while higher mortgage and business lending rates risk weakening demand further.
The picture is not uniformly inflationary. Food inflation held at 1.3%, and price growth at restaurants and hotels eased to 3.8% from 4.1%.
But core and services inflation moving higher together will make it harder for the Bank to dismiss the latest increase as temporary.
The government’s October 28 Budget adds another constraint. Elevated gilt yields increase debt-servicing costs and limit room for fiscal support just as households face a renewed cost-of-living squeeze.
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