UK inflation jumps to 3.5% as fuel soars, firming rate hike bets

What happened

Consumer prices in Britain were 3.5% higher in September than a year earlier, the Office for National Statistics (ONS) said on Wednesday, up from 3.1% in August and 2.9% in July. Economists surveyed by Reuters had penciled in 3.4%, CNBC reported. Fuel did most of the lifting: petrol averaged 169.5 pence per liter and diesel 192.5 pence, both the priciest since mid-2022, leaving motor fuel costs 29.8% above last year's level. Core inflation, which strips out energy, food, alcohol and tobacco, climbed to 2.8% from 2.6%, while services inflation rose to 3.7% from 3.4%.

What it means

The headline jump is mostly an energy story. Britain imports more energy than it produces, so outside shocks reach households quickly, and the US-Iran conflict has disrupted oil shipments through the Strait of Hormuz, CNBC noted. Goods inflation reached 3.2%, its fastest pace since September 2023, and heating oil (kerosene) prices also jumped during the month. Food was the exception: grocery inflation held at 1.3%, a rate the ONS said was last lower in September 2021.

For the Bank of England, the bigger worry is whether higher costs are spreading beyond the pump. Central banks often look through energy spikes because they can fade on their own. Rising core and services inflation, though, can signal what economists call second-round effects, where businesses raise prices and workers seek higher pay to keep up. Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, said the recent climb had "undone the progress we saw in the spring" and argued the case for a hike has grown stronger. The ONS figures also show UK inflation running above France at 3.4% and Germany at 3.3%.

Traders had largely priced this in. LSEG data cited by CNBC put the odds of a quarter-point increase to 4% at next month's meeting at 98%, with most also expecting a second move in December. That helps explain why the pound and gilt yields (the interest rates on UK government bonds) barely budged after the release: the reading was hotter than forecast, but only by a tenth of a percentage point.

The numbers also land awkwardly for Chancellor John Healey, who presents his first Autumn Budget next week. Separate official figures out the same day estimated that UK national debt topped £3 trillion in September for the first time, according to CNBC. Higher inflation can raise the cost of servicing that debt and add pressure for cost-of-living help, shrinking room for tax cuts or extra spending. Healey has said he intends to keep fiscal discipline while supporting growth.

The bull case

For savers and for sterling, a firmer Bank of England can be supportive: higher policy rates usually mean better returns on cash and can draw foreign money into UK assets. Food inflation remains subdued, and if the energy shock eases, headline inflation could fall back almost as fast as it rose, allowing the central bank to stop after one or two hikes rather than tightening for a long stretch.

The bear case

Raising rates while the economy struggles to grow risks squeezing households and companies already paying more for fuel and heating. Mortgage borrowers and domestically focused businesses tend to feel costlier credit first. Rising core and services inflation hint that price pressure is broadening, which could keep rates higher for longer, and a tight budget next week could add a further drag on growth.