U.K. Inflation Jumps Again, Strengthening Case for Rate Hike — 3rd Update

By Don Nico Forbes

U.K. inflation rose further above the Bank of England's target in September as policymakers prepare for a meeting that investors expect will yield a first rate increase since the start of the war between the U.S. and Iran.

Consumer prices rose 3.5% in September compared with a year earlier, up from 3.1% growth in August, the Office for National Statistics said Wednesday. A consensus of economists polled by The Wall Street Journal expected a slightly cooler reading of 3.4%.

The increase comes as global energy costs continue to rise due to the war in Iran, complicating the BOE's efforts to bring inflation back to its 2% target.

"Britain is facing a perfect storm of imported inflation pressures," David Rees, an economist at Schroders, said.

The rise in headline inflation was driven by a jump in fuel and heating oil price growth, with tentative signs of higher energy costs feeding through to non-energy inflation.

The Bank of England held its key interest rate at 3.75% in September, but investors have increasingly anticipated a rate increase at its next meeting on Nov. 5 as the inflation outlook has deteriorated.

The BOE's latest projections, published in September, pointed to inflation rising to around 3.75% in the fourth quarter of 2026 and slightly above 4% in the first quarter of 2027, based on energy prices at the time.

Still, the key question for policymakers is how much of the increase in inflation reflects the direct impact of energy prices, and whether it will spread to other parts of the economy.

Core inflation, which strips out volatile food and energy prices, rose more than expected to 2.8% in September, from 2.6% in August. Services inflation ticked up to 3.7%, compared with 3.4% a month prior. Both metrics are watched closely by policymakers to determine the extent of second-round price effects from higher energy costs.

"Food and manufactured-goods prices look set to climb in the months ahead, pushing CPI towards 4%," Rees said.

The BOE has been particularly concerned about businesses passing higher costs on to consumers and workers seeking higher wages to compensate for the loss of purchasing power. On Tuesday, data showed weekly earnings growth, excluding bonuses, rising in the three months through August.

"The upside surprise to inflation paired with resilient economic activity and a stable, if subdued, labour market means that the benefits of raising interest rates outweigh the risks," said Berenberg economist Andrew Wishart.

Rising inflation is adding to pressures facing the U.K. government, which will outline its budget on Oct. 28.

"[It is] a perilous high-wire act for the Chancellor, increasing pressure for cost-of-living support while pushing up government borrowing costs, which is shrinking fiscal headroom and narrowing his policy options," said Suren Thiru, an economist at The Institute of Chartered Accountants in England and Wales.

And while a November rate rise looks all but certain, BOE policymakers will be watching the budget closely for policies that could add further fuel to inflation, potentially opening the door to even higher interest rates down the line.

Write to Don Nico Forbes at don.forbes@wsj.com

(END) Dow Jones Newswires

October 21, 2026 05:45 ET (09:45 GMT)