UK inflation rose to 3.5% in the year to September, the highest rate in nearly a year, driven by higher petrol and diesel prices and exceeding the Bank of England's 2% target, the Office for National Statistics said. The increase was slightly higher than economists had predicted. Motor fuel prices rose by 29.8% compared to September last year, accounting for most of the upward movement in the main inflation measure, the Consumer Prices Index.
The Bank of England, which currently sets its base interest rate at 3.75%, closely monitors inflation figures when deciding whether to adjust borrowing costs. Higher interest rates make borrowing more expensive, reducing spending and demand for goods, which can slow price rises. However, the central bank faces a balancing act: raising rates also increases mortgage repayments for homeowners and makes businesses less likely to invest or hire, potentially harming economic growth.
While inflation remains elevated above the 2% target, it has fallen dramatically from the 11.1% peak reached in October 2022, when gas and oil prices soared following Russia's invasion of Ukraine. The Bank of England governor Andrew Bailey said at the September meeting that energy price volatility made it more likely that interest rates would rise. Inflation is expected to climb further in coming months, with a 4% increase in household energy bills taking effect from 1 October and petrol prices likely to rise again after disruptions to global energy markets.
Core inflation, which excludes volatile food and energy costs, reached 2.8% in the 12 months to September, up from 2.6% in August. The Bank had warned in April that disruption to global energy markets could push UK inflation as high as 6% in a worst-case scenario. The government scrapped VAT on household electricity bills in October, predicted to have a small downward impact on inflation. Official figures show that regular pay in the UK grew ahead of inflation in the three months to August, with average annual pay growth of 3.7% excluding bonuses, meaning real pay grew by 0.8% after accounting for inflation.
The UK is not alone in facing inflation pressures. The eurozone inflation rate was 3.8% in September, up from 3.2% in August, while US inflation reached 3.7% in September, up from 3.4% in August, also affected by higher fuel costs. The European Central Bank has raised interest rates to 2.5%, and the Federal Reserve raised rates for the first time in three years in September to a range of 3.75-4%, citing inflation being "too high".