UK inflation hits 3.5% in September, above forecasts, and public debt passes £3 trillion a week before Healey's budget

The Office for National Statistics reported that consumer price inflation climbed to 3.5% in the 12 months to September, up from 3.1% in August and 2.9% in July. Economists polled by Reuters had forecast 3.4%. The Bank of England's July forecast was 3.0%.

It is the highest annual reading since October 2025.

Fuel does the damage

The ONS said motor fuels made the largest upward contribution. Motor fuel prices were up 29.8% on the year, and the fuel inflation rate was the highest since August 2022.

Petrol rose 8.2p a litre between August and September, against a 0.2p fall in the same stretch last year. Diesel rose 10.7p a litre, against a 0.4p fall. Transport prices rose 6.6% year on year, up from 4.6% in August.

The cause is the U.S.-Iran war and the disruption to oil and gas flows through the Strait of Hormuz. Britain imports much of its natural gas, which leaves it exposed to energy shocks. Healey blamed the war: "We know that price rises from conflicts in the Middle East and Europe are hitting Britain and countries worldwide."

Month on month, prices rose 0.4%, after a 0.5% rise in August.

Underlying pressure is building

The headline number is not the whole story. Services inflation rose to 3.7% from 3.4%, slightly above the 3.6% economists expected. Core inflation, which strips out food, energy, alcohol and tobacco, rose to 2.8% from 2.6%, also above forecasts. Food inflation held at 1.3%.

The Bank of England is watching whether the energy shock spreads into wages and prices generally. The central bank has said the shock has had a limited effect on broader inflation so far. Governor Andrew Bailey and other policymakers have said a rate hike becomes more likely the longer energy prices stay high.

Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said headline inflation had "undone the progress we saw in the spring" and that services inflation raises concern about "second round inflationary effects beyond energy prices." Adam Deasy, an economist at PwC UK, said inflation nearing 4% "makes it harder to simply look through the shock."

A rate hike looks all but priced in

The Bank Rate is 3.75%. LSEG data show markets pricing a 98% chance of a 25 basis point rise to 4% at the November 5 meeting, which would be the first increase since 2023. Most traders also expect a second hike of the same size in December. Danni Hewson, head of financial analysis at AJ Bell, said a second increase before year-end is more than 50% likely.

Sterling was flat against the euro and the dollar after the release, and gilt yields barely moved.

Healey's first budget, with less room

Separate ONS figures showed public sector net debt passed £3 trillion in September for the first time. Borrowing for the month was nearly £25 billion, more than forecast. Higher debt costs, which are linked to inflation, contributed.

Healey presents his first budget on October 28. He is expected to offer more help to households hit hardest by energy prices, but he has said he will maintain "fiscal discipline," and the government's fiscal rules limit his options.

Greg Thwaites, interim chief economist at the Resolution Foundation, described the "double dilemma": easing cost-of-living pressure while keeping a lid on borrowing. Ruth Gregory, deputy chief economist at Capital Economics, expects a cautious budget "that has little net impact on the economy and leaves the toughest fiscal choices for next year."

September's inflation rate is the one the government traditionally uses to uprate benefits, so the figure also raises spending. According to the Guardian's reporting, a 3.5% uprating would lift weekly child benefit for a first child by 95p to £28. The tax firm Ryan said the figure also pushes up inflation-linked business rates in England, raising more than £1 billion in extra receipts, mostly from hospitality, leisure, education, health, transport and utility firms.

The Guardian also reported that September CPI came in below the 3.9% wage growth figure for the three months to July, which means the state pension will almost certainly rise by the higher number under the triple lock.

The Guardian cited Charlotte O'Leary, an economist at the National Institute of Economic and Social Research, as saying the run of rising annual inflation was likely to continue. Bank of England officials are concerned that inflation will pass 4% next year as the price of a wider range of goods responds to higher oil and gas costs.

The next checkpoint is the October 28 budget, followed by the Bank of England's November 5 decision.