UK inflation rose to 3.5% in the 12 months to September, up from 3.1% in August, as higher fuel prices pushed the annual rate to its highest level in almost a year. The figure exceeded market forecasts, with the consumer price index (CPI) climbing amid the economic impact of energy price rises triggered by the Iran war.
Fuel prices drive inflation
Brent crude oil, the international benchmark, has surged to between $95 and nearly $100 per barrel this month, significantly higher than the roughly $70 level seen before the US and Israel launched strikes in Iran. The sharp increase in oil prices since the Iran war erupted in late February has begun feeding through to the cost of goods and services for households across the country.
"Inflation climbed notably in September to its highest annual rate in almost a year," said Grant Fitzner, chief economist at the Office for National Statistics. "Increased fuel prices were again the main driver, with the cost of diesel the highest since July 2022. Other upward pressures included airfares and, to a lesser extent, computer games and live events, which are often volatile."
Core and services inflation rise
Services inflation crept up to 3.7%, while core inflation, which excludes volatile items such as energy, increased by 2.8% over the past 12 months, rising from 2.6% in August.
City economists had long cautioned that a surge in global oil prices would gradually filter through the economy, given the delays associated with the energy price cap and the time required for businesses to pass on additional costs to consumers.
Bank of England under pressure
The Bank of England's Monetary Policy Committee is particularly watchful of "second round effects", whereby rising costs prompt workers to negotiate higher wages, triggering a spiralling impact on prices.
The Bank has thus far chosen to hold interest rates steady at 3.75%. City forecasters believe the MPC could vote to tighten monetary policy at its forthcoming meeting in November, pushing interest rates up to four per cent.
Alongside its monetary policy announcement, the Bank will publish fresh forecasts on inflation and the broader price pressures within the UK economy. Its ruling will come just one week after the Budget.
Chancellor John Healey is facing mounting pressure to alleviate concerns over inflation through new spending packages, having repeatedly stated his desire to offer "breathing space" to both businesses and households. The Bank of England has previously cautioned that inflation would breach four per cent, with projected price increases over the winter months set to intensify pressure on Healey in the run-up to next week's Budget.
