UK inflation jumps to 3.5% in September on fuel costs, firming bets on a November rate rise

Annual consumer price inflation in the UK rose to 3.5% in September, the highest rate in nearly a year^1,4. It was 3.1% in the year to August, according to the Office for National Statistics^4,8.

The rise was larger than expected^5,6. A surge in petrol and diesel costs drove the increase, which took inflation to an 11-month high³. Fuel prices driven up by the war were the main push⁶.

The Bank of England’s target is 2%⁴. September’s reading leaves inflation further above that target as policymakers prepare for their next meeting⁷.

Why it matters to investors

The figure strengthens expectations of a Bank of England rate rise in November⁵. Bank of England officials are widely forecast to raise interest rates when they meet next month⁶, and the reading has been described as cementing expectations of a hike².

The November meeting is expected to produce the first rate increase since the start of the Iran war⁷. Until now the Bank has opted not to raise rates⁵. A surprisingly large increase in prices leaves the Bank with a harder decision³.

The data also arrive days before the government sets out its tax and spending plans. Inflation and government borrowing were both at their highest for a year ahead of next week’s Budget⁸. Over the first six months of the fiscal year the government did cut borrowing, but at a slower pace than planned⁹.

That slower progress underlines the challenge that rising prices and interest payments pose for the public finances⁹. Higher inflation raises the government’s own costs at the same moment it is trying to show that borrowing is coming down^8,9.

One revenue option is already off the table. The chancellor has rejected calls to raise capital gains tax in the Budget¹⁰. Influential Labour figures had been pushing to equalise capital gains tax with income tax, while critics argued that the change could drive wealthy people out of Britain¹⁰.

What to watch

The first test is next week’s Budget, which will show how the government handles borrowing that is falling more slowly than planned^8,9. With capital gains tax ruled out, attention will turn to which other measures the chancellor uses¹⁰.

The second is the Bank of England’s November decision. The meeting is expected to deliver a first rate increase since the Iran war began⁷, and markets will be watching whether officials signal more than one move^2,5.

The third is fuel. Petrol and diesel drove September’s jump³, so the path of energy prices will shape whether inflation keeps climbing above the Bank’s 2% target^4,6.