LONDON — British inflation climbed faster than expected to 3.5 percent in the 12 months through September, propelled by soaring motor fuel costs and intensifying expectations of an imminent interest rate increase, official data showed Wednesday.
The annual pace reported by the Office for National Statistics exceeded the 3.4 percent consensus forecast among economists surveyed by Reuters. The figure marked the third consecutive monthly acceleration, climbing from 2.9 percent in July and 3.1 percent in August to reach its highest point in nearly a year.
Energy Shocks and Rising Fuel Costs
The primary driver behind the acceleration was transportation energy. Motor fuel prices jumped 29.8 percent during the year leading into September, the ONS reported. That marked the fastest rate of fuel price inflation since August 2022, when global energy markets were rattled by Russia’s invasion of Ukraine.
As a net importer of energy, Britain remains heavily exposed to global crude disruptions. Pressures have mounted following conflict involving the U.S., Israel, and Iran that erupted in February, leading to Iranian threats against commercial maritime traffic navigating the Strait of Hormuz. Those disruptions drastically escalated shipping expenses and marine insurance rates, according to the BBC.
Following Wednesday’s inflation announcement, financial markets showed a muted initial response. The British pound held steady against both the U.S. dollar and the euro, while yields on U.K. sovereign debt remained broadly unchanged, CNBC reported.
Pressure Mounts on Central Bank and Treasury
The sharp price acceleration has cemented investor bets on monetary tightening. Financial markets are pricing in a 98 percent probability that the Bank of England will lift its benchmark interest rate by a quarter percentage point to 4 percent in November, according to data from LSEG. Most traders anticipate another quarter-point hike at the central bank’s final policy gathering of the year in December.
Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, warned in a research note cited by CNBC that recent acceleration had erased springtime progress. He noted that accelerating services inflation will raise worries over secondary inflationary pressures beyond raw energy, strengthening the rationale for higher borrowing costs.
The surge also creates an acute dilemma for Chancellor of the Exchequer John Healey, who is scheduled to present his maiden Autumn Budget next week. Healey must balance binding fiscal rules to restrain government borrowing against growing calls to shield households from living expenses.
Compounding the problem, separate figures released Wednesday indicated that British national debt crossed the £3 trillion mark — approximately $4 trillion — in September for the first time. Elevated interest rates have made managing that debt burden substantially more expensive while domestic growth remains sluggish.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, told CNBC that escalating inflation turns the upcoming budget into a delicate balancing act, as higher borrowing costs shrink the government’s spending flexibility. Healey stated Wednesday that his fiscal plan next week will maintain discipline while seeking to support economic growth and offer relief to households and businesses.
