UK inflation hits 3.5% as BoE eyes rate hike

UK consumer price inflation climbed to 3.5% in September, reaching its highest annual rate in 11 months and remaining above the Bank of England’s 2% target. The latest reading marks an acceleration from 3.1% in August, at a time when prices for goods and services are still rising faster than policymakers would like.

Higher petrol and diesel prices were identified as a major factor pushing overall inflation higher. The September figure is also notable because it is the last inflation release before both the government’s Autumn Budget and the Bank of England’s next interest rate decision.

Recent labour market figures for the three months to August showed an unexpected drop in the unemployment rate to 4.7%. At the same time, wages excluding bonuses grew by about 3.7% year on year, narrowly beating some forecasts.

With wage growth running above the August inflation rate and still firm against the latest price data, there are concerns that higher energy and fuel costs could feed into broader wage and services inflation. These dynamics are being closely watched by monetary policymakers assessing the persistence of price pressures.

In the run‑up to the September inflation release, money‑market pricing indicated roughly a 90–96% probability that the Bank of England would raise its base rate by 25 basis points to 4.00% at the Monetary Policy Committee meeting on 5 November 2026. The combination of stronger labour data and higher inflation has reinforced expectations of a rate move.

Policymakers have signalled concern that the ongoing energy price shock linked to the Iran war is affecting broader inflation, including through wages. Officials have warned that the longer such pressures persist, the harder it will be for the central bank to refrain from tightening policy.

The September inflation figure and the latest labour market data arrive just ahead of Chancellor John Healey’s first Budget, scheduled for 28 October 2026. The Budget will set out the government’s tax and spending plans against a backdrop of above‑target inflation and expectations of higher interest rates.

Because this is the final inflation reading before the Budget and the Bank’s November meeting, it is a key reference point for investors assessing the outlook for public finances and gilt yields. Markets are weighing how fiscal policy decisions and potential monetary tightening might interact as the government responds to elevated inflation and a still‑tight labour market.