A man shields himself from the rain as he walks near the Bank of England building as the Monetary Policy Committee lowers interest rates, in London, England, December 18, 2025.
Toby Melville Reuters
UK inflation rose by a hotter-than-expected 3.5% in the 12 months to September, driven by rising motor fuel costs.
Economists polled by Reuters have estimated an annual inflation rate of 3.4%.
The September print marks the continuation of the upward trend in the UK for inflation, which came in at 3.1% in August and 2.9% in July. The September reading was the highest annual inflation figure in nearly a year.
Britain’s Office for National Statistics said on Wednesday that the rate of motor fuel inflation had reached its highest level since August 2022, when fuel costs rose due to Russia’s full-scale invasion of Ukraine.
The UK is a net energy importer, making it vulnerable to external energy shocks, such as the US-Iran war and the subsequent struggle to move oil through the Strait of Hormuz.
UK motor fuel prices rose 29.8% in the year to September, ONS data showed on Wednesday.
At British pound flat to two the euro and the US dollar after the data release, and yield on British government bonds they also changed a little.
Scott Gardner, an investment strategist at JP Morgan Personal Investing, said in a note Wednesday morning that the recent growth in headline inflation has “reversed the progress we saw in the spring.”
“Bank of England policymakers will be looking beyond the main figures,” he said. “Inflation in services, in particular, has accelerated in recent months which will raise concerns that we will begin to see the effects of second-round inflation beyond energy prices. While we face different challenges compared to 2021, the prolonged conflict weighs on the British economy and makes the case for a rate increase even stronger.”
The market is pricing in a 98% chance that the Bank of England will raise the key interest rate by 25 basis points to 4% next month, according to LSEG data, with the majority of traders also pricing in an increase of more than the same size at the last meeting of the central bank of the year in December.
Head budget
An expected rise in inflation on Wednesday also weighed on the fiscal picture for the UK government and finance minister.
Chancellor of the Exchequer John Healey is set to unveil the first fiscal shakeup next week in the UK’s much-anticipated Autumn Budget.
He was tasked with enforcing the fiscal rules called for by the previous government, which aimed to rein in public debt while keeping promises to reduce rising consumer costs.
But separate data published on Wednesday showed Britain’s national debt was estimated to exceed £3 trillion ($4 trillion) in September for the first time. The cost of servicing those debts has risen sharply over the past year, and the UK economy is struggling to grow.
Healey said in a statement after Wednesday’s data release that he would “maintain our fiscal discipline” in next week’s budget, while working to “drive growth. [and give] businesses and families some breathing space.”
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said in a note Wednesday morning that rising inflation has turned the Autumn Budget into a “perilous high-wire act for the Chancellor.”
He said rising prices are “increasing pressure on cost-of-living support while increasing the cost of government borrowing, which reduces fiscal space and reduces policy options.”
“With inflation on the rise, the cuts are coming down strongly for the November rate hike,” he said. “Policymakers will also look to the Chancellor to avoid adding fuel to the fire of inflation by delivering a credible budget and fiscal discipline.”