Sterling near one-month high as UK inflation accelerates to 3.5%
Key Facts
Sterling traded near its highest level in about a month after British inflation accelerated more than expected, Reuters reported, bolstering bets on an interest rate increase in November. The Office for National Statistics said in data published on Wednesday, 21 October 2026, that annual consumer price inflation rose to 3.5% in September. The reading was above August's 3.1%, marking an acceleration in annual price growth from the previous month. It also exceeded the forecasts of economists polled by Reuters, who had expected inflation to rise to 3.4% in September. On a monthly basis, the consumer price index rose 0.4%, the ONS said, alongside the increase in the annual rate that dominated currency market attention.
Price growth also accelerated in services, with inflation in the sector rising to 3.7% in September, according to Reuters' report on the British data. Services prices had risen 3.4% annually in August before the jump in the latest reading. September's rate also exceeded economists' forecast of 3.6%, adding an upside surprise in services to the higher-than-expected headline inflation figure. Separately, the ONS said core inflation rose to 2.8% in September from 2.6% in August. The measure excludes energy, food, alcohol and tobacco, and its acceleration added to the rise in services inflation in the latest price data.
Transport, particularly motor fuels, made the largest upward contribution to the acceleration in inflation, according to the ONS. Motor fuel prices rose 29.8% annually in September, compared with an increase of 23.0% in August, making them a prominent driver of rising consumer costs. The Bank of England had warned in the minutes of its September meeting that the pass-through of indirect energy effects to consumer prices could be delayed. The bank said these effects may have been "delayed rather than diminished", referring to energy-related pressures on the inflation outlook. In the minutes, it forecast inflation would reach slightly above 4% in the first quarter of 2027, based on prevailing energy prices when that forecast was prepared.
The inflation reading follows the Monetary Policy Committee's decision at its September meeting to keep the official interest rate at 3.75%, according to the Bank of England's statement. The committee voted 6 to 3 to hold rates steady, before the release of the new inflation data that prompted market bets on an increase. In the labour market, Britain's unemployment rate stood at 4.7% in the period from June to August 2026, according to the ONS. The office published the reading on 20 October, ahead of the consumer price data. Despite the decline in the unemployment rate, the number of payrolled employees fell during the latest quarter, the ONS said, leaving lower unemployment accompanied by a decline in this measure of employment.
In Wednesday trading following the inflation release, Investing.com reported that sterling rose 0.07% against the dollar. The British currency traded at $1.3392 during the session in which September's data were released, according to the website. In interest rate markets, Reuters said traders were almost fully pricing in a 25-basis-point increase in November. The agency described traders as "almost fully pricing in a rate hike" following the upside inflation surprise. Investing.com's analysis accompanying the data said broader dollar weakness was contributing strongly to sterling's rise, adding another factor behind the currency market move.
Britain's next round of releases begins with retail sales data, which the ONS has scheduled for publication on 23 October 2026. The following week, Chancellor John Healey aims to ease the burden of rising living costs through his budget statement, according to the Associated Press. He said the statement would aim to give businesses and households "some breathing room" as price pressures persist. The Bank of England's next interest rate decision is due on 5 November 2026, according to the schedule announced in its previous meeting statement. The next consumer inflation release is scheduled for 18 November 2026, according to the ONS, after the monetary policy decision.