Key takeaways
- UK inflation rose to 3.5% in the year to September 2026, up from 3.1% in August and above the 3.4% economists had expected, according to the Office for National Statistics.
- Motor fuel prices were 29.8% higher than a year earlier, the steepest annual rise since August 2022, as the Iran war and the near-closure of the Strait of Hormuz lifted crude oil.
- Markets and most economists now expect the Bank of England to raise Bank Rate from 3.75% to 4.0% on November 5, which would be its first increase in more than three years.
- Public debt passed £3 trillion for the first time in September, and debt interest hit a record for the month, leaving Chancellor John Healey little room before his October 28 Budget.
UK inflation rose to 3.5% in the year to September 2026, according to figures the Office for National Statistics (ONS) published on October 21, 2026. That was up from 3.1% in August and above the 3.4% forecast in a Reuters poll. The main driver was a surge in fuel prices linked to the war involving Iran and the near-closure of the Strait of Hormuz, which hardens expectations of a Bank of England rate rise and complicates next week’s Budget.
The reading is the highest annual rate since October 2025, when it was 3.6%, according to analysis of the ONS release by AskTraders. Prices rose 0.4% on the month. It is the final inflation reading before the Bank of England’s Monetary Policy Committee meets on November 5, and it lands one week before the Chancellor’s first Budget.
Why did UK inflation rise to 3.5% in September?
Energy was the cause. The ONS said motor fuel prices were 29.8% higher than a year earlier, up from 23.0% in August and the highest since August 2022. Petrol averaged 169.5p a litre and diesel 192.5p, and transport made the largest upward contribution to the annual rate, according to the same analysis.
The Guardian, in a report carried by AOL, linked the rise to the conflict that began when the US and Israel went to war with Iran in February. The practical closure of the strait of Hormuz to most fossil fuel traffic has kept Brent crude well above $100 a barrel. Grant Fitzner, the ONS chief economist, said diesel was at its highest since July 2022 and that factory input and output costs were still climbing.
Underlying measures also moved up. Core inflation, which strips out energy, food, alcohol and tobacco, rose to 2.8% from 2.6%, and services inflation climbed to 3.7% from 3.4%, according to AskTraders. Services inflation is closely watched by the Bank of England as a sign that cost pressures are spreading.
What does the data mean for Bank of England interest rates?
A Bank of England increase on November 5 now looks the base case. CNBC reported that markets are pricing two Bank of England rate rises by the end of the year. A Reuters poll of 63 economists conducted from October 12 to 14 found that 54 expected Bank Rate to rise from 3.75% to 4.0%, as reported by Reuters. The same poll found no majority for a further rise after that.
Policymakers are not united on how far to go. Bank of England chief economist Huw Pill, who has voted for an increase since April, pushed back against market expectations of a series of hikes, according to Reuters coverage republished by Global Banking and Finance. Governor Andrew Bailey said in Bangkok last week that there was little evidence yet of the energy shock spreading widely, but that a longer conflict makes a hike harder to avoid, according to a Bloomberg report carried by swissinfo.
The Bank’s own projection, cited by GB News, is for inflation of about 3.75% by the end of 2026 and a peak near 4.2% in the first quarter of 2027. The International Monetary Fund expects a peak towards the close of 2026, while Goldman Sachs sees as much as 3.9% in early 2027. The spread of forecasts reflects uncertainty about how long oil stays elevated.
The British move would follow tightening elsewhere. Bloomberg noted that investors expect the Bank to join the US Federal Reserve and the European Central Bank in raising rates.
How does the Hormuz shock narrow Healey’s Budget options?
Higher inflation and higher rates feed directly into the cost of government borrowing. ONS figures published on October 21 showed borrowing of about £24.5bn in September, above market expectations of around £23bn. Debt interest payments reached £10.9bn, the highest for any September on record, according to the Guardian via AOL.
Public sector debt topped £3 trillion for the first time, City AM reported. As a share of GDP, it stood at 94%, slightly below a year earlier. The ONS said gilt yields reached levels not seen this century during September.
Chancellor John Healey presents the first Budget of Prime Minister Andy Burnham’s government on October 28, according to AFP. In a statement after the data, Healey said he would keep up “fiscal discipline” while giving households some breathing space, as CNBC reported. Conservative shadow chancellor Andrew Griffith argued the figures show Labour has lost control of the economy, a claim the government does not accept. Healey has already ruled out one tax option, as covered in Intelligence Report’s analysis of the capital gains tax decision.
Why is a Gulf shipping dispute showing up in British prices?
Britain is a net energy importer, which leaves it exposed to external supply shocks, according to analysis of the data by GuruFocus. Oil and gas costs pass through to commercial transport, heating and a wider basket of goods. The Guardian noted that fears of inflation above 4% next year stem from that second-round effect. For the oil-market side of the same shock, see Intelligence Report’s report on Brent near $110.
Deutsche Bank’s Sanjay Raja pointed out that the October rise in the Ofgem household energy price cap will mean higher bills over the winter, as AskTraders noted. That suggests the effect will not fade quickly even if crude prices ease.
What to watch
- October 28, 2026: Healey’s Budget, including any tax rises and the scale of cost-of-living support, and the accompanying fiscal forecasts.
- November 5, 2026: the Bank of England decision, the vote split on the Monetary Policy Committee, and the new quarterly forecasts.
- Gilt yields: whether long-dated borrowing costs ease or extend their rise after the Budget.
- Strait of Hormuz: any change in tanker traffic or Brent crude, which is the main variable behind the inflation outlook.
- Next ONS release: October inflation data, to show whether core and services inflation keep rising.
Frequently asked questions
What is the UK inflation rate now?
UK consumer price inflation was 3.5% in the 12 months to September 2026, according to the Office for National Statistics. That is up from 3.1% in August and above the 3.4% economists expected. It is the highest annual rate since October 2025, and fuel prices were the main cause.
Why is UK inflation rising?
The main driver is motor fuel. The ONS said fuel prices were 29.8% higher than a year earlier, the biggest annual rise since August 2022. The Iran war and the practical closure of the Strait of Hormuz to most fossil fuel traffic have pushed Brent crude well above $100 a barrel.
Will the Bank of England raise interest rates in November?
Most forecasters expect so. A Reuters poll found 54 of 63 economists expect Bank Rate to rise from 3.75% to 4.0% at the November 5, 2026 meeting, which would be the first increase in over three years. The Bank has not announced a decision, and economists are divided on any further rises.
Sources
- UK inflation jumps to 3.5%, cementing rate hike expectations (CNBC)
- UK Inflation Rises to 3.5%, Above Forecasts, as Fuel Prices Surge (AskTraders)
- Inflation rises to 3.5% as diesel and petrol prices push up cost of living (AOL)
- UK inflation rises by more than expected to 3.5% as war drives up fuel prices (Guardian via AOL)
- Rising UK inflation, debt knocks govt ahead of budget (AFP via France 24)
- UK debt pile exceeds £3 trillion one week before Healey's Budget (City AM)
- UK government borrowing rises to £24.5bn as John Healey prepares for budget (Guardian via AOL)
- BoE to raise rates to 4% in November, but economists narrowly expect hold from there: Reuters poll
- UK Inflation Can Seal the Deal on the BOE's November Rate Hike (Bloomberg via swissinfo)
- UK inflation rise to highest level in 11 months (GB News)
Top image: Steve Daniels / Wikimedia Commons (CC BY-SA 2.0)
This article was produced by the Intelligence Report Desk. Sources are linked below.
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