Annual consumer price inflation in the United Kingdom climbed to 3.5% in September 2026, marking its highest level since October 2025, according to the Office for National Statistics (ONS). This figure represents an increase from the 3.1% recorded in August.
The acceleration, which surpassed market expectations, arrives just one week before the Labour government is scheduled to deliver its annual budget on 28 October, an event anticipated to address ongoing cost-of-living challenges.
The primary driver behind the inflationary spike was the cost of fuel. Average diesel prices in September hit their highest point since July 2022, a surge attributed to the impact of the US-Iran war on global petrol and diesel markets. Transport costs overall saw a significant increase, rising 6.6% year-on-year, compared to 4.6% in the previous month.
Additionally, services inflation accelerated to 3.7%, with communication costs and housing and household services rising by 5.8% and 5.3% respectively. Food inflation remained stable at 1.3%, while core CPI inflation rose to 2.8% from 2.6%. Compared with August, consumer prices rose 0.4%, following a 0.5% increase.
Danni Hewson, head of financial analysis at AJ Bell, noted that households are facing pressure from a slight rise in the energy price cap and are bracing for further increases early next year. Hewson explained that expectations are influenced by rising service costs, as well as the significant increase in the price of raw materials that businesses use to produce, on top of the jump in the cost of transporting those goods.
"The knowledge that funding our lives is only going to get harder in the coming months will impact consumer confidence," Hewson added.
These inflationary pressures have led to widespread expectations that the Bank of England will raise interest rates during its 5 November meeting, potentially marking the first such increase since 2023. Markets currently view a November rate hike as nearly certain, with a greater than 50% probability of a second increase before the end of the year.
The current benchmark interest rate stands at 3.75%, well above the Bank of England's 2% target.
In a separate release, the ONS revealed that public sector net borrowing reached £24.5 billion (€29.2 billion) in September 2026, exceeding market expectations and representing an increase of £1.8 billion (€2.1 billion) compared to the same month last year. The ONS attributed this to spending—including rising debt interest costs—outpacing government income, partly due to the effects of inflation.
Total government borrowing between April and September 2026 reached £97.8 billion (€116.5 billion), which is £6 billion (€7.1 billion) more than the forecast provided by the Office for Budget Responsibility. Furthermore, public sector net debt was provisionally estimated to have exceeded £3 trillion (€3.57 trillion) for the first time, though it fell to 94% of GDP from 94.7% a year earlier.
