UK inflation rises to 3.5% – boosting expectations of a rate rise

Inflation in the UK rose a more-than-expected 3.5% in the 12 months to September, driven by rising fuel prices.

Economists polled by Reuters had forecast an annual inflation rate of 3.4%.

The September figures mark the continuation of the upward trend in inflation in the United Kingdom, which stood at 3.1% in August and 2.9% in July. The September figure is the highest annual inflation figure in almost a year.

Britain’s Office for National Statistics said on Wednesday that the rate of car fuel inflation had reached its highest level since August 2022, when fuel prices rose following Russia’s full-scale invasion of Ukraine.

Britain is a net importer of energy, making it vulnerable to external energy shocks, such as the US-Iran war and the subsequent struggle to move oil through the Strait of Hormuz.

Fuel prices in the UK jumped 29.8% in the year to September, according to ONS data released on Wednesday.

THE Pound sterling was flat against both the euro and the US dollar after the data release, and returns on UK government bonds have also changed little.

Scott Gardner, an investment strategist at JP Morgan Personal Investing, said in a note Wednesday morning that recent growth in headline inflation had “undone the progress we saw in the spring.”

“Bank of England policymakers will look beyond the headline figure,” he said. “Services inflation, in particular, has accelerated in recent months, which will raise concerns that we are starting to see second-round inflationary effects beyond energy prices. Although we face a different set of challenges than in 2021, the prolonged conflict is weighing on the UK economy and strengthening the case for a rate hike.”

Markets are pricing in a 98% chance that the Bank of England will raise its key rate by 25 basis points to 4% next month, according to LSEG data, with the majority of traders also expecting a further hike of the same magnitude at the central bank’s final meeting of the year in December.

The expected rise in inflation on Wednesday also complicates the budgetary situation of the British government and its Finance Minister.

Chancellor of the Exchequer John Healey is expected to unveil his first budget shake-up next week in the UK’s much-anticipated autumn budget.

He is tasked with sticking to the previous government’s so-called fiscal rules, which aim to rein in public debt while delivering on promises to soften the blow of rising consumer costs.

But separate data released on Wednesday showed the UK’s national debt was estimated to have topped £3 trillion ($4 trillion) for the first time in September. The cost of servicing these debts has risen significantly over the past year and the UK economy is struggling to grow.

Healey said in a statement following Wednesday’s data release that he would “maintain our fiscal discipline” in next week’s budget, while working to “spur growth (and give) businesses and families some breathing space.”

Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said in a note on Wednesday morning that rising inflation was turning the autumn budget into “an act of peril for the chancellor”.

He said the price surge was “increasing pressure for cost-of-living support while increasing the government’s borrowing costs, reducing fiscal space and restricting its policy options.”

“With inflation rising, the elements are now firmly in place for a rate hike in November,” he said. “Policymakers will also be counting on the Chancellor to avoid fueling the fire of inflation by presenting a credible and fiscally disciplined Budget.”