UK inflation climbed to 3.5% in the 12 months to September, exceeding the 3.4% forecast by economists polled by Reuters, as motor fuel prices reached their highest level since August 2022. The Office for National Statistics said motor fuel inflation had surged 29.8% in the year to September, driven partly by Britain's vulnerability to external energy shocks as a net energy importer. The September reading marked the highest annual inflation figure in almost a year, continuing an upward trend that saw inflation at 3.1% in August and 2.9% in July.
The acceleration has intensified expectations of interest rate rises. According to LSEG data, markets are pricing in a 98% chance that the Bank of England will raise its key interest rate by 25 basis points to 4% next month, with the majority of traders also expecting a further hike of the same size in December. Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said the recent growth in headline inflation had reversed progress made in spring, and noted that services inflation in particular has accelerated recently, suggesting second-round inflationary effects beyond energy prices alone.
The inflation spike complicates the government's fiscal position ahead of the Autumn Budget. The Office for National Statistics also reported Wednesday that the UK's national debt exceeded £3 trillion ($4 trillion) in September for the first time, with the cost of servicing those debts rising sharply over the past year. Chancellor of the Exchequer John Healey is set to unveil his first fiscal package next week while adhering to the previous government's fiscal rules designed to rein in public debt.
Healey said in a statement he would maintain fiscal discipline while working to drive growth and give businesses and families support. However, Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, described the Autumn Budget as a perilous high-wire act for the Chancellor, with rising inflation increasing pressure for cost-of-living support while simultaneously pushing up government borrowing costs and shrinking fiscal headroom. The British pound was flat against the euro and US dollar following the data release, and yields on UK government bonds were largely unchanged.
For UK savers and borrowers, rising inflation combined with higher interest rate expectations means savings could earn better returns but borrowing costs will increase, while businesses face higher debt servicing costs and uncertain consumer demand.