Inflation rose to 3.5 per cent in September, its highest level in almost a year, according to new figures from the Office for National Statistics (ONS). The Consumer Prices Index (CPI) increased from 3.1 per cent in August, largely driven by rising petrol and diesel prices. The latest increase means the cost of everyday goods and services is rising at a faster rate, with economists warning that inflation could climb above four per cent this winter.
Transport costs drive September rise
The ONS said transport costs were the biggest contributor to September's rise, particularly higher prices at petrol stations. Motor fuel prices increased by almost 30 per cent in the year to September, compared with a 23 per cent annual rise in August. Average petrol prices reached 169.5p per litre, while diesel climbed to 192.5p per litre, their highest levels in more than four years.
Air fares and sea fares also contributed to the overall annual inflation rate. Food and non-alcoholic drink inflation remained at 1.3 per cent, unchanged from August and close to its lowest level in five years. Food prices actually fell by 0.2 per cent between August and September, although some products, including breakfast pastries, cakes and crisps, continued to put upward pressure on inflation.
What does 3.5% inflation mean for households?
An inflation rate of 3.5 per cent means something that cost £100 in September last year would cost approximately £103.50 now. It does not mean every household bill has increased by the same amount, as prices for individual goods and services can rise or fall at different rates. The increase from 3.1 per cent to 3.5 per cent also does not mean prices have risen by 3.5 per cent in a single month; it means the annual rate of price increases has accelerated.
Households could face further pressure over the winter after Ofgem's energy price cap increased by four per cent in October. Economists have warned that inflation could rise above four per cent in the coming months, with Pantheon Macroeconomics forecasting a possible peak of 4.8 per cent in February.
Mortgage and savings outlook
The Bank of England has held its base rate at 3.75 per cent since the end of 2025, but economists increasingly expect an increase to four per cent when its Monetary Policy Committee meets next month. A higher base rate could mean increased repayments for borrowers on tracker mortgages and some variable-rate deals. Homeowners approaching the end of a fixed-rate mortgage could also face higher borrowing costs, depending on the deals available when they remortgage. However, borrowers already on fixed-rate agreements would not see their monthly repayments change until their existing deal ends.
Thomas Pugh, chief economist at RSM UK, said the combination of higher inflation and a stronger jobs market "almost guarantees an interest rate hike next month". He also warned that a second increase could follow in 2027 if inflation exceeds four per cent.
New analysis from Moneyfactscompare.co.uk found that 1,683 savings accounts currently offer rates above September's 3.5 per cent inflation figure. These include 138 easy access accounts, 127 notice accounts, 121 variable-rate Cash ISAs, 425 fixed-rate Cash ISAs and 872 fixed-rate bonds. The average new savings rate stood at 3.78 per cent gross on October 21, slightly above the latest inflation figure.
Moneyfacts calculated that someone saving £10,000 for one year could earn £515 in interest with a leading one-year fixed-rate account paying 5.15 per cent. By comparison, an account paying two per cent would generate just £200 in interest over the same period, below the £350 increase in prices implied by inflation of 3.5 per cent.
Caitlyn Eastell, Personal Finance Analyst at Moneyfactscompare.co.uk, said: "With the cost of living continuing to put pressure on households, savers can't afford to be complacent about where their money is held. Watching a savings balance creep up can offer reassurance, but if the interest earned fails to keep pace with inflation, that money is effectively losing spending power." She added: "Those who require more flexibility needn't miss out, either. The top easy access rate has risen from 0.65% five years ago to 4.89% today, giving savers a much stronger return while keeping their cash accessible." Savers can compare available accounts and interest rates through Moneyfactscompare.co.uk.
Impact on benefits and next steps
September's inflation figure is normally used by the UK Government when considering annual increases to benefits from the following April. Disability benefits are legally required to be uprated in line with prices, while increases to other benefits depend on the relevant government decisions and legislation. The Scottish Government makes its own decisions on uprating devolved benefits and has generally used September's CPI figure to determine annual increases.
The State Pension - classed as a contributory benefit - is covered by the Triple Lock, which guarantees an annual increase in line with the highest of September CPI inflation, average earnings growth or 2.5 per cent. As earnings growth was higher at 3.9 per cent, this will determine the State Pension increase from April 2027. The new payment rates for April 2027 are expected to be confirmed by Chancellor John Healey during the Autumn Budget on October 28.
The Bank of England will consider the latest inflation figures when its Monetary Policy Committee meets next month to decide whether interest rates should increase. Meanwhile, Chancellor John Healey is facing further pressure to address household living costs ahead of next week's autumn Budget statement. The Chancellor said the UK Government aims to give "businesses and families some breathing space", while the Trades Union Congress has called for further action to support living standards.
Prime Minister Andy Burnham has also confirmed that he has asked the Chancellor and Energy Secretary Miatta Fahnbulleh to look at removing standing charges from household gas bills. However, no decision has been announced on the proposal or how the costs currently covered by standing charges would be recovered. Households will also be watching future energy price cap announcements, with economists warning that further increases in energy costs could push inflation higher over the winter.
