UK Inflation Rises More Than Expected to 3.5%, Strengthening the Case for a November Bank of England Rate Hike

Britain's inflation problem is getting worse again — and this time the pressure is not confined to the petrol pump, because the measures the Bank of England watches most closely moved the wrong way too.

UK inflation rose to 3.5% in the 12 months to September 2026, up from 3.1% in August, the Office for National Statistics said on Wednesday, Oct. 21. Prices rose 0.4% on the month, compared with little change in September 2025. The annual rate was the highest since October 2025, when it stood at 3.6%, and it came in above the 3.4% median forecast in a poll of economists. The broader measure including owner occupiers' housing costs rose 3.6%, up from 3.3% in August.

Fuel prices did the damage at the pump

Transport, particularly motor fuels, made the largest upward contribution to the change in the annual rate, while restaurants and hotels made the largest partially offsetting downward contribution. Motor fuel prices rose 29.8% in the 12 months to September, up from 23.0% the previous month, and the motor fuel inflation rate was the highest since August 2022. The average price of petrol rose by 8.2 pence per litre between August and September to 169.5 pence per litre, its highest since August 2022, and diesel rose by 10.7 pence to 192.5 pence per litre, its highest since July 2022.

Grant Fitzner, the statistics office's chief economist, said inflation climbed notably in September to its highest annual rate in almost a year, with increased fuel prices again the main driver. Other upward pressures included air fares, which fell by less than they did a year earlier, and, to a lesser extent, computer games and live events, which are often volatile. Hotel stays partly offset the rise, with prices increasing by less than this time last year, and the annual cost of raw materials and of goods leaving factories continued to rise, driven by higher crude oil and petrol prices respectively.

The underlying measures moved the wrong way too

What makes this release harder for the Bank of England is that the acceleration was not only about fuel. Core inflation, which excludes energy, food, alcohol and tobacco, rose to 2.8% from 2.6% and was also above expectations. Services inflation, which the Bank views as a guide to underlying price pressures, jumped to 3.7% from 3.4%, above the 3.6% economists had forecast. Goods inflation rose from 2.7% to 3.2%, its highest since September 2023, while food inflation held at 1.3%. Transport prices overall rose 6.6% over the year, up from 4.6%.

The pattern inside the basket was broad. Recreation and culture prices rose 0.7% on the month as live music and computer game downloads pushed higher, housing and household services inflation reached 5.3% on the consumer prices measure, and goods inflation on the housing-costs measure hit its highest since September 2023. September was also the third consecutive monthly increase in the headline rate, after 2.9% in July and 3.1% in August — a steady climb, not a one-month blip.

A miss against both the consensus and the Bank's own forecast

September's 3.5% overshot two benchmarks at once. Economists polled had expected 3.4%, as the surge in energy prices caused by the war in the Gulf gathered more steam last month. The Bank of England had predicted a smaller rise to 3.0% for September in forecasts it published in July — a September-specific comparison, and a reminder of how quickly the energy shock has moved past the Bank's summer assumptions. Britain has been hit harder than most Western economies by the conflict because of its heavy reliance on imported natural gas, and UK inflation in September was also higher than France's 3.4% and Germany's 3.3%.

November, the budget and what happens next

The release lands a week before Chancellor John Healey's first budget, where he is expected to offer further support for the households hit hardest by the jump in energy prices, and it adds to the case for an increase in interest rates by the Bank of England in November. Bank Rate stands at 3.75%, and investors expect a rise to 4% at the Bank's next meeting on November 5, which would be the first increase in three years. That is an expectation, not a decision: the question for policymakers is how much of the rise reflects the direct impact of energy prices, and how far it spreads into wages and other prices. Watch the November 5 decision and its accompanying forecasts, the budget next week, and whether the October increase in the household energy price cap pushes headline inflation higher still in the months ahead.