Britain's annual inflation rate accelerated to 3.5% in September, up from 3.1% in August, according to the Office for National Statistics (ONS). The figure, the highest since October 2025, was driven largely by rising fuel prices, with diesel costs reaching their steepest level since July 2022 amid the ongoing US-Iran conflict.
The data lands a week before the Labour government presents its autumn budget on 28 October, which is expected to address cost-of-living pressures. The higher-than-expected reading complicates the fiscal picture, as households and businesses grapple with mounting energy and transport bills.
Fuel and services push inflation higher
Transport costs were the main upward contributor, rising 6.6% year-on-year, up from 4.6% in August. Motor fuel prices have been particularly volatile, reflecting global oil market tensions. Services inflation also picked up to 3.7%, while housing and household services rose 5.3% and communication costs climbed 5.8%. Food inflation remained steady at 1.3%.
Core CPI, which excludes volatile food and energy, increased to 2.8% from 2.6%. On a monthly basis, consumer prices rose 0.4% in September, following a 0.5% gain in August.
Danni Hewson, head of financial analysis at AJ Bell, noted that the energy price cap rose slightly in October, with households bracing for an even larger increase early next year. "Expectations are influenced by rising service costs, as well as the significant increase in the price of raw materials that businesses use to produce, on top of the jump in the cost of transporting those goods," she said. "The knowledge that funding our lives is only going to get harder in the coming months will impact consumer confidence."
Bank of England under pressure
The Bank of England is now widely expected to raise interest rates at its next meeting on 5 November, which would be the first such move since 2023. Market pricing suggests a near-100% probability of a hike, with more than a 50% chance of a second increase before the end of the year, according to Hewson. The central bank's benchmark rate currently stands at 3.75%, well above its 2% inflation target.
The move would follow similar actions by the European Central Bank and the US Federal Reserve, as inflation pressures re-emerge across major economies. In the eurozone, inflation has climbed to 3.8%, driven by energy costs, while US inflation ticked up to 3.7%.
Public debt tops £3 trillion
In a separate release, the ONS reported that public sector net borrowing reached £24.5 billion (€29.2 billion) in September, £1.8 billion more than a year earlier and above market expectations. The increase reflects higher spending, including debt interest costs, which have been inflated by rising bond yields.
UK 10-year gilt yields were just below 5.4% at the end of September, having hit a 19-year high earlier that month. The global bond sell-off has made borrowing more expensive for leading economies, including the US, France, Germany and the UK.
Public sector net debt exceeded £3 trillion (€3.57 trillion) for the first time at the end of September, though as a share of GDP it fell to 94% from 94.7% a year earlier. Borrowing for the April-September period reached £97.8 billion (€116.5 billion), slightly below the same period last year but £6 billion more than the Office for Budget Responsibility had forecast.
The combination of stubborn inflation and elevated borrowing costs poses a challenge for Chancellor Rachel Reeves as she prepares the budget. With households facing higher energy bills and mortgage rates, the government's fiscal headroom is narrowing, and any stimulus measures could be constrained by market discipline.
Across Europe, similar pressures are prompting public discontent. Inflation protests have spread in several countries, and the EU is weighing its limited role in addressing energy costs. In the UK, the focus now shifts to the Bank of England's decision and the budget's impact on living standards.
