UK Inflation Hits 3.5% as War-Driven Fuel Prices Squeeze Budget

UK inflation jumped to 3.5% in September, overshooting City forecasts of 3.4% and landing a double blow on Chancellor John Healey just days before his budget. The same day's figures showed the government deficit came in worse than forecast at £24.5bn.

The Office for National Statistics (ONS) said annual inflation rose from 3.1% in August, driven by surging fuel costs. Oil and gas prices have soared since late February, when the US and Israel launched their war on Iran, throttling fuel flows through the Strait of Hormuz.

Petrol was the single biggest culprit. The average price rose 8.2p a litre from August, against a 0.2p fall in the same period last year. Diesel — much of it refined in the Middle East — climbed 10.7p a litre, compared with a 0.4p drop in September 2025. Air fares, heavily exposed to fuel prices, fell far less than usual after the summer peak.

What does this change for the public finances? Plenty. The government paid £10.9bn in debt interest last month: the highest September figure since records began, and only the eighth time the monthly number has exceeded £10bn. Payments on some government bonds track inflation, and the ONS said higher prices added £4bn to debt interest costs in September alone.

Total government debt is estimated to have hit £3tn for the first time. As a share of the economy, though, it actually fell to 94%, from 95% a year ago. Public sector net borrowing for the financial year so far stands at £97.8bn — £4.4bn lower than last year, but still £6bn above what the independent Office for Budget Responsibility had expected. Rising inflation has pushed up government borrowing costs, the key factor behind the deterioration in the public finances since the spring statement in March.

There was some relief for households elsewhere. Clothing costs fell slightly, and food price growth held steady at 1.3% as supermarket competition offset rising transport costs.

What does this mean for rates?

The reading makes a Bank of England rate rise from the current 3.7% level look increasingly likely when the monetary policy committee meets on 5 November. Rate setters worry inflation will push above 4% next year as a wider range of goods responds to higher oil and gas prices.

Martin Beck, chief economist at the consultancy WPI, said a hike was almost inevitable — but he urged caution: "Raising interest rates cannot produce more oil or gas, and further tightening risks weakening an already fragile economy."

Charlotte O'Leary, an economist at the National Institute of Economic and Social Research, expects three consecutive months of rising annual inflation to continue through the winter even if the Middle East conflict eases. "Higher fuel and transport costs will likely push up food prices, and January's large price cap increase will land as household energy demand peaks. Given this, inflation could reach 4%, double the Bank of England's target, by early 2027," she said.

What does the September reading lock in?

Under indexing rules, most working-age welfare benefits will rise by 3.5% from next April — more than expected. Weekly child benefit for a first child goes up 95p, to £28. Business rates in England will also jump by more than forecast: the tax firm Ryan said the inflation-linked rise could raise more than £1bn in extra receipts for the Treasury, paid mostly by organisations in hospitality, leisure, education, health, transport and utilities.

One quirk works in pensioners' favour. September's CPI of 3.5% came in below the 3.9% wage growth figure for the three months to July, so the state pension will almost certainly rise by the higher number under the triple lock formula.

Healey laid the blame on the Gulf conflict. "We know that price rises from conflicts in the Middle East and Europe are hitting Britain and countries worldwide," he said, adding that his budget would "drive for growth in every postcode" to improve living standards.

With consumers facing a renewed cost of living squeeze, record debt interest and a probable rate rise on the horizon, Healey's budget next week will have to do the heavy lifting with very little room to move.