Global Market: UK inflation rises to 3.5% in September, boosting rate hike bets

UK inflation accelerates to 3.5% in September as higher energy costs add to household pressures.

Annual consumer price inflation rose to 3.5% in September from 3.1% in August, the Office for National Statistics said on Wednesday. Economists polled by Reuters had forecast inflation of 3.4%.

The latest reading marked the highest inflation rate since October 2025, with higher petrol and diesel prices accounting for much of the increase, according to the ONS. The acceleration also exceeded the Bank of England's July forecast, which had projected inflation rising to 3.0%.

The figures could strengthen the case for an interest rate increase in November as policymakers assess the impact of higher energy prices on the broader economy and the persistence of domestic inflationary pressures.

Underlying inflation measures also came in above expectations. Services price inflation, closely monitored by the Bank of England as an indicator of domestic price pressures, accelerated to 3.7% in September from 3.4% in August. The Reuters poll had forecast a smaller increase to 3.6%.

Core inflation, which excludes volatile components such as food, energy, alcohol and tobacco, also picked up, rising to 2.8% from 2.6% in August. The increase suggested that price pressures were broadening beyond energy-related costs.

The inflation data come a week before Finance Minister John Healey's first budget, when the government is expected to consider additional measures to help households most affected by the recent surge in energy prices.

The increase in living costs could complicate the government's efforts to balance household support with its fiscal commitments, particularly if higher inflation forces the central bank to maintain tighter monetary conditions or raise borrowing costs.

Britain has been more exposed than many other Western economies to the economic fallout from the war in the Gulf because of its heavy reliance on imported natural gas. Higher energy prices risk feeding through to household bills, transport costs and businesses' operating expenses, potentially prolonging inflationary pressures.

The latest figures present a challenge for the Bank of England, which must weigh the risk of persistent inflation against concerns about economic growth and the pressure on consumers from elevated borrowing costs. Stronger-than-expected services and core inflation could make policymakers more cautious about easing monetary policy, while further energy price increases could complicate the outlook for both inflation and household spending.