UK Inflation Climbs to 3.5% as Fuel Prices Surge

Rising energy costs pushed UK annual inflation to 3.5% in September, increasing pressure on households and businesses while strengthening expectations of an interest rate increase by the Bank of England in November. The Office for National Statistics (ONS) released the figures Wednesday, October 21, 2026, ahead of Chancellor of the Exchequer John Healey's first Autumn Budget, scheduled for next week.

The consumer price inflation rate accelerated from 3.1% in August and 2.9% in July, marking its third consecutive monthly increase and its highest level since October 2025. The September figure also exceeded the 3.4% forecast by economists surveyed by Reuters, moving inflation further above the central bank's 2% target, according to ONS data.

Motor fuel prices rose 29.8% over the 12 months to September, compared with an annual increase of 23% in August, according to the ONS. The latest increase brought fuel inflation to its highest level since August 2022, while diesel prices reached their highest point since July 2022, the agency reported.

The ONS attributed much of the inflation increase to transport costs and higher fuel prices. Rising airfares, computer games and live events also contributed, while crude oil and petrol prices pushed up the annual costs of raw materials and goods leaving factories.

The conflict involving the United States and Israel against Iran, which began in late February, has intensified concerns about energy supplies. Threats to shipping through the Strait of Hormuz have increased oil transportation costs and disrupted the movement of energy supplies, affecting the UK, a net energy importer.

ONS Chief Economist Grant Fitzner said the annual costs of raw materials and factory-gate goods continued to rise because of higher crude oil and petrol prices.

Financial markets have increasingly anticipated tighter monetary policy as inflation accelerates. According to LSEG data cited by CNBC, markets were pricing in a 98% probability of a 25-basis-point increase in November, which would raise the Bank of England's main interest rate from 3.75% to 4%. Traders were also anticipating another increase in December.

Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, said the latest inflation figures had reversed improvements recorded earlier in the year.

"undone the progress we saw in the spring." Gardner said in a Wednesday morning note that the increase in headline inflation had reversed earlier gains.

Gardner also warned that developments beyond energy costs could complicate the inflation outlook.

"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 U.K. economy and making the case for a rate hike stronger."

The inflation increase also complicates the government's fiscal planning as borrowing costs rise and economic growth remains weak. Separate figures published Wednesday showed that UK government debt exceeded £3 trillion in September for the first time, equivalent to approximately $4 trillion.

Healey is preparing his first Autumn Budget while facing pressure to contain public debt and address the rising cost of living. The government must also work within fiscal rules intended to control borrowing while meeting commitments to support households and businesses.

Following the inflation release, Healey said he would maintain fiscal discipline while pursuing economic growth and helping businesses and families manage rising costs.

"maintaining our fiscal discipline" Healey said in a statement, adding that the government would "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, said the combination of higher inflation and borrowing costs had sharply constrained the government's budgetary choices.

"a perilous high-wire act for the Chancellor." Thiru described the challenge facing Healey as inflation increased pressure for household support while raising the government's financing costs.

"increasing pressure for cost-of-living support while pushing up government borrowing costs, which is shrinking fiscal headroom and narrowing his policy options." Thiru said in a Wednesday morning note.

Thiru also said the latest figures strengthened expectations of an imminent monetary policy change.

"With inflation increasing, the pieces are falling firmly into place for a November rate rise," he said. "Policymakers will also be looking to the Chancellor to avoid adding fuel to the inflation fire by delivering a credible, fiscally disciplined Budget."

The Conservative shadow chancellor criticized the government's economic management, saying Labour had lost control of the economy and needed urgent action to address the deficit. Healey's Autumn Budget is scheduled for next week, while the Bank of England's next interest rate decision is expected on November 5.