Britain’s headline inflation rate climbed to 3.5% in the 12 months to September, topping economist forecasts and extending a troubling upward trend.
Economists polled by Reuters had projected an annual inflation rate of 3.4%, making the September reading a hotter-than-expected result.
The September figure marked the highest annual inflation reading in almost a year, following readings of 3.1% in August and 2.9% in July.
The UK’s Office for National Statistics said motor fuel inflation hit its highest level since August 2022, when costs surged after Russia’s full-scale invasion of Ukraine.
UK motor fuel prices surged 29.8% in the year to September, according to ONS data released Wednesday.
Britain’s status as a net energy importer leaves it exposed to external energy shocks, including the US-Iran war and the struggle to move oil through the Strait of Hormuz.
The British pound was flat against both the euro and the US dollar following the data release, with yields on UK government bonds also little changed.
Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said recent growth in headline inflation had “undone the progress we saw in the spring.”
Gardner warned that “services inflation, in particular, has accelerated in recent months which will create concern that we are starting to see second round inflationary effects beyond energy prices.”
He added that “the prolonged conflict is weighing on the UK economy and making the case for a rate hike stronger,” signaling growing concern among market strategists.
Markets are now pricing in a 98% chance that the Bank of England raises its key interest rate by 25 basis points to 4% next month, according to LSEG data.
A majority of traders are also pricing in a further hike of the same size at the central bank’s final meeting of the year in December.
Wednesday’s inflation data also deepens the fiscal challenges facing Chancellor of the Exchequer John Healey ahead of next week’s hotly anticipated Autumn Budget.
Healey is tasked with honoring the previous government’s fiscal rules, which aim to rein in public debt while delivering relief to households facing surging consumer costs.
Separate data published Wednesday showed UK national debt was estimated to have exceeded £3 trillion, or roughly $4 trillion, in September for the first time.
Healey said in a statement that he would be “maintaining our fiscal discipline” while working to “drive for growth [and give] businesses and families some breathing space.”
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, described rising inflation as turning the Autumn Budget into “a perilous high-wire act for the Chancellor.”
Thiru said surging prices were “increasing pressure for cost-of-living support while pushing up government borrowing costs, which is shrinking fiscal headroom and narrowing his policy options.”
He concluded that “with inflation increasing, the pieces are falling firmly into place for a November rate rise,” urging the Chancellor to avoid “adding fuel to the inflation fire.”
