UK consumer price inflation accelerated to 3.5% in the year to September, up from 3.1% in August and the fastest pace in nearly a year, the Office for National Statistics reported on Wednesday. The reading, which matched market expectations, was driven largely by a sharp increase in motor fuel costs, but underlying price pressures also strengthened.
Core inflation, which strips out volatile food and energy components, rose to 2.8% from 2.6%. Services inflation, a key gauge of domestically generated price growth that the Bank of England watches closely, climbed to 3.7% from 3.4%. The combination of higher headline, core, and services inflation complicates the central bank's assessment of whether price pressures are becoming entrenched.
Petrol prices drive the headline increase
Motor fuel inflation reached 29.8% in September, up from 23% in August. Petrol averaged 169.5 pence per litre, the highest level since August 2022, while diesel reached 192.5 pence, its highest since July of that year. Transport inflation accelerated to 6.6% from 4.6%, making it the single largest contributor to the September increase.
Elevated pump prices hit household budgets immediately and also raise distribution and operating costs for businesses. Some of those costs may eventually be passed on to customers, creating a channel through which energy price shocks can feed into broader inflation.
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 rather than a consensus forecast, but it illustrates how a prolonged oil and gas shock could keep prices rising.
Bank of England faces a tougher November decision
Bank Rate remains at 3.75%. At the September meeting, six policymakers voted to leave rates unchanged while three favoured 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.
This article is for informational purposes only and does not constitute financial advice.
