UK inflation climbed to 3.5% in the 12 months to September, surpassing economist forecasts and marking its highest annual reading in almost a year.
Economists polled by Reuters had expected an annual inflation rate of 3.4%, making the September print a hotter-than-anticipated result for markets and policymakers alike.
The figure continues a sharp upward trend, following readings of 3.1% in August and 2.9% in July, reflecting sustained and growing price pressures across the economy.
The Office for National Statistics said on Wednesday that the motor fuel inflation rate had hit its highest level since August 2022, when fuel costs surged in the wake of Russia’s full-scale invasion of Ukraine.
UK motor fuel prices surged 29.8% in the year to September, according to ONS data published on Wednesday, emerging as the primary driver behind the headline inflation jump.
Britain is a net energy importer, making it particularly vulnerable to external energy shocks, such as the US-Iran war and the subsequent 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, and yields on UK government bonds were also little changed.
Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said in a note Wednesday morning that recent growth in headline inflation had “undone the progress we saw in the spring.”
“Bank of England policymakers will be looking beyond the headline figure,” he said. “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. While we face a different set of challenges compared to 2021, the prolonged conflict is weighing on the UK economy and making the case for a rate hike stronger.”
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.
The 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, underscoring how decisively sentiment has shifted toward tightening.
Wednesday’s inflation data also complicates the fiscal picture heading into next week’s hotly anticipated Autumn Budget, to be delivered by Chancellor of the Exchequer John Healey.
Healey is tasked with adhering to the previous government’s fiscal rules, which aim to rein in public debt while delivering on promises to ease surging consumer costs.
Separate data published Wednesday showed the UK’s national debt was estimated to have exceeded £3 trillion in September for the first time, adding to the pressure on the Chancellor’s plans.
Healey said in a statement following Wednesday’s data that he would be “maintaining our fiscal discipline” in the budget next week, 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, warned that rising inflation is turning the Autumn Budget into “a perilous high-wire act for the Chancellor.”
He 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.”
“With inflation increasing, the pieces are falling firmly into place for a November rate rise,” Thiru added. “Policymakers will also be looking to the Chancellor to avoid adding fuel to the inflation fire by delivering a credible, fiscally disciplined Budget.”