Inflation in the UK rose to 3.5% in September from 3.1% in August, according to figures published this morning by the Office for National Statistics. Economists had expected 3.4%, and the Bank of England's own forecast pointed to around 3.0%. It is the highest rate since October 2025, and a sharp turn from the 2.6% recorded in June, then the lowest in more than a year. Prices rose 0.4% in the month alone. Core inflation, which strips out energy, food, alcohol and tobacco to show underlying pressure, rose to 2.8% from 2.6%, also above the 2.7% forecast.
Fuel did most of the damage. Motor fuel prices were 29.8% higher than a year earlier, the steepest rise since August 2022, with a litre of petrol averaging 169.5p and diesel 192.5p, both the dearest since the summer of 2022. Goods inflation jumped to 3.2%, its highest in three years, while services inflation, the measure the Bank watches most closely because it reflects wages, rose to 3.7% from 3.4%. Air fares added to the rise, falling by less than usual after the summer holidays. Food was the bright spot, with inflation steady at 1.3% as supermarkets compete hard on price. For most households, the pain is at the pump rather than the checkout.
For the Bank of England, which sets UK interest rates, the figures settle the argument. Last month it held Bank Rate at 3.75% on a six to three vote, with three members backing a rise to 4.00%. Markets now treat a quarter point increase on 5 November as all but certain, which would be the first rise since 2023, and price around four rises by the middle of 2027. The timing is awkward for the Chancellor, John Healey, who presents his first Budget on 28 October: higher inflation pushes up interest costs on government debt and leaves less room for giveaways.
What it means for GBP/EUR
The pound strengthened. GBP/EUR rose to around 1.1922 by 08:10, its strongest level in seventeen months and a fifth consecutive daily gain, leaving sterling up close to 2% against the euro so far in October. The driver is mostly interest rates: the Bank of England looks set to raise rates while the European Central Bank is expected to keep its deposit rate at 2.50%, widening the gap in the pound's favour, and concerns over French public finances are weighing on the euro. The risk now runs the other way. A Budget that unsettles the gilt market, where the government borrows, could undo part of the rally quickly. For a business with euro supplier invoices due after the Budget, a forward contract fixes today's rate, the best in seventeen months, for a payment due on a future date.
