Petrol and diesel drove September’s jump from 3.1%, the Office for National Statistics says, but services inflation also rose to 3.7%, the sign the Bank of England is watching. It decides on 5 November, a week after the Budget.
Prices rose faster in September than City economists expected, and that moves the Bank of England closer to raising interest rates on 5 November. Consumer price inflation reached 3.5% in the year to September, up from 3.1% in August and above the 3.4% economists had forecast, the ONS reported on 21 October.1 It is the highest rate in 11 months.
Fuel did most of it. Motor fuel prices were 29.8% higher than a year earlier, against 23.0% in August. Petrol averaged 169.5p a litre and diesel 192.5p, the highest since August and July 2022 respectively.1 Food, by contrast, stayed at 1.3%, a rate the ONS says contributed less to inflation than at any time since September 2021.1
The explanation is not mysterious, and the Chancellor has offered it himself. John Healey said price rises from conflicts in the Middle East and Europe are “hitting Britain and countries worldwide”.2 What matters for the Bank is whether the energy shock is staying in energy. This month’s figures give both sides something.
The ONS names motor fuel as the main reason the transport group’s annual inflation rose to 6.6% from 4.6%. Transport alone added 0.94 percentage points to the 3.5%.1 The pump prices behind it track the Middle East conflict: the Resolution Foundation said in September that higher petrol prices were the largest upward pressure on August’s figure and that the peak is not expected until winter.4
Beneath the fuel, other measures moved too. Goods inflation rose to 3.2%, its highest since September 2023; services rose to 3.7% from 3.4%; and core inflation, which strips out energy, food, alcohol and tobacco, rose to 2.8% from 2.6%.1 Some of the services rise is calendar noise rather than spreading costs. The ONS says air fares fell by 19.5% between August and September, against a 28.8% fall a year earlier, and that the end of the Great British Summer Savings scheme on 1 September probably lifted prices for cultural events and cinema admission, though not by enough to affect the headline.1
The economists reading these numbers divide on what they show. Thomas Pugh of the consultancy RSM said the data “almost guarantees an interest rate hike next month”.2 Cathal Kennedy of RBC Capital Markets saw “limited evidence of broader inflationary pressures” but still thought the Bank unlikely to stand in the way of a rise.2 The Food and Drink Federation, the ONS notes, expects food inflation to arrive later and last longer, as retailers and manufacturers stop absorbing costs.1 Charlotte O’Leary of the National Institute of Economic and Social Research, as reported by the Guardian, said “Higher fuel and transport costs will likely push up food prices”, and warned inflation could reach 4% by early 2027.5
The Bank’s job is to stop a temporary jump in prices becoming permanent. In September three of nine rate-setters already voted for 4%, and the deputy governor said waiting too long could prove a mistake, as we reported on 21 October. Services inflation above forecast is the first sign it is moving.1
Martin Beck of the consultancy WPI Economics said “Raising interest rates cannot produce more oil or gas” and that tightening risks weakening a fragile economy.5 August growth was only 0.1%, as we reported on 17 October, and a rate rise falls on borrowers while the cause is on the supply side.
A move from 3.75% to 4% adds about £250 a year in interest on each £100,000 of borrowing that tracks Bank Rate, by simple arithmetic. Fixed-rate borrowers feel it only when their deal ends.
September’s figure also feeds the state. The Guardian reported that the 3.5% will set next April’s uprating of most benefits, adding 95p to weekly child benefit for the first child, while the state pension is due to rise by the higher 3.9% earnings measure under the triple lock.5 Higher prices raise tax receipts but also benefit bills and debt interest; the Resolution Foundation says the net effect has halved the Chancellor’s room for manoeuvre to about £12bn.6
Households face the next push from energy bills. The Resolution Foundation expects the energy price cap to reach around £2,000 in January.6 It also argued against extending the fuel duty freeze, which it says benefits higher-income households most, and for targeted energy discounts for lower-income households.4
Whether services inflation is the start of second-round effects or an air-fares and calendar blip; one month cannot show which. How the Bank will weigh it: the committee has said it cannot give firm guidance on the path of rates.
Chancellor Healey delivers the Budget on 28 October, with new Office for Budget Responsibility forecasts, which will show how much of this inflation the official forecasters expect to last. The Bank of England’s Monetary Policy Committee announces its decision on 5 November. The ONS publishes October inflation on 18 November.1
That figure starts from a higher base for fuel. The government’s weekly series had petrol at 174.57p and diesel at 199.33p in the week beginning 19 October, above the mid-September levels the ONS captured, though down 0.71p on the week from a peak in the week before.7