UK inflation has accelerated to its highest level in almost a year, strengthening expectations that the Bank of England will raise interest rates next month as surging fuel costs and higher winter energy bills threaten to prolong the squeeze on households.
Consumer Prices Index inflation rose to 3.5 per cent in September, up from 3.1 per cent in August, according to figures published by the Office for National Statistics on Wednesday. The reading exceeded economists’ expectations and moved inflation further away from the Bank’s 2 per cent target.
Motor fuel was a major driver, with petrol and diesel prices rising by 30 per cent in the year to September as the US-Israeli war with Iran disrupted global oil and gas supplies and pushed up wholesale prices.
The renewed inflationary pressure presents a challenge for policymakers, who must weigh the risk of higher prices becoming entrenched against the strain that increased borrowing costs would place on mortgage holders and businesses.
Martin Sartorius, lead economist at the Confederation of British Industry, said the latest figures meant an interest rate increase was “firmly on the table” at the Bank’s November meeting.
Policymakers would want to “guard against the risk of persistently higher headline inflation becoming embedded in future wage and price-setting behaviour”, he added.
Sanjay Raja, chief UK economist at Deutsche Bank, said further energy price increases were “inevitable”, with continuing tensions in the Middle East delaying the prospect of inflation easing. He expects rates to rise in November and again in subsequent months.
There was some relief for consumers: food and drink inflation remained unchanged at 1.3 per cent, while prices fell 0.2 per cent between August and September. But analysts warned that supermarket competition might not be enough to contain food costs indefinitely.
Danni Hewson, head of financial analysis at AJ Bell, said the “knowledge that funding our lives is only going to get harder in the coming months will impact consumer confidence”.
Consumers could bolster savings and postpone major purchases, she added, increasing the pressure on the government to provide support.
Chancellor John Healey, who is due to deliver his autumn Budget next week, said he would “look to do more” to provide “breathing space” on living costs.
The September inflation figure will also influence benefit increases and the state pension triple lock. However, pensions are widely expected to rise by 3.9 per cent next April, reflecting stronger wage growth rather than inflation.
The latest figures underline the difficult choices facing policymakers: containing inflation may require higher interest rates just as households confront another winter of elevated living costs.
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