UK Inflation Hits 3.5%, Highest in Almost a Year, Rate Hike Looms

UK consumer prices rose 3.5% in the year to September, the highest inflation reading in almost a year and enough to cement market expectations that the Bank of England will raise interest rates on Nov. 5. The Office for National Statistics published the figures Wednesday.

September's 3.5% print is up from 3.1% in August and above the 3.4% that most economists had expected, according to the ONS data. It marks the highest rate since October last year. It also pushes inflation further above the Bank of England's 2% target.

What drove the spike?

Transport costs were the biggest contributor to last month's acceleration, particularly at the pump. Motor fuels soared 30% in the year to September, up from a 23% annual rise in August.

The cause is geopolitical. Fuel costs have climbed because of the Iran war and the resulting bottlenecks in the Strait of Hormuz, which have squeezed global oil and gas supplies. UK interest rates had been trending downward from a 15-year high of 5.25% until the U.S. and Israel attacked Iran in late February — a shift that reversed the disinflationary course.

What is the Treasury doing about it?

Treasury chief John Healey said his budget statement next week will aim to give businesses and families "some breathing space" from the upward march in the cost of living. He gave no detail on the specific measures in the statement.

Whatever he announces, economists don't expect fiscal policy to stop the monetary tightening cycle. Most anticipate the Bank of England will raise its main rate at the next meeting on Nov. 5.

How certain is a November rate rise?

Last month, rate-setters held the bank's main rate at 3.75% but signaled they were ready to hike soon. Most economists now expect an increase to 4%.

"With inflation increasing, the pieces are falling firmly into place for a November rate rise," said Suren Thiru, chief economist at ICAEW.

The UK wouldn't be acting alone. Other central banks, including the U.S. Federal Reserve and the European Central Bank, have raised rates recently.

What comes next?

The sequence is tight. Healey delivers his budget statement next week, the ONS figures land amid a fuel-price shock, and the Bank of England's Nov. 5 decision follows shortly after. If inflation keeps running above 3% while Hormuz disruptions persist, a hike to 4% would still leave UK rates well below the 5.25% peak — meaning policymakers would retain room to tighten further if prices don't cool.