UK inflation rises to 3.5%, beating forecasts and bolstering rate hike bets
Key Facts
Britain's annual consumer price inflation rose to 3.5% in September 2026 from 3.1% in August, according to the Office for National Statistics, exceeding expectations and reinforcing existing bets on an interest rate increase. The data released on 21 October topped forecasts from economists polled by Reuters, who had expected the annual rate to reach 3.4% in September. The acceleration extended to core inflation, which excludes food, energy, alcohol and tobacco, rising to 2.8% year on year from 2.6% in August, according to the agency. Services inflation also rose to 3.7% in September from 3.4% the previous month, alongside increases in both the headline and core measures. The services reading also exceeded economists' forecast of 3.6% in the Reuters poll, with both headline and services inflation delivering upside surprises.
Within consumer prices, annual transport inflation reached 6.6% in September, according to the Office for National Statistics bulletin for the month. The average price of diesel stood at 192.5 pence per litre during the month, the office said in the bulletin's fuel price breakdown. Restaurant and hotel prices rose 3.8% from a year earlier, according to the official September data. Meanwhile, annual food and non-alcoholic beverage inflation stood at 1.3%, matching the rate recorded in August. Food price inflation thus held steady between the months, while services inflation accelerated over the same period, according to figures Reuters reported from the September release.
On the production side, a separate Office for National Statistics bulletin showed producer input prices rose 8.3% year on year in September 2026. Producer output prices at the factory gate rose 4.6% from the same month a year earlier, according to the producer prices bulletin. The office attributed the increase in both input and output inflation mainly to oil-related products, linking those products to accelerating prices across stages of production. Describing the main driver, it said: "The increases in input and output price inflation were mainly driven by oil-related products." Within producer output, prices for coke and refined petroleum products rose 63.3% year on year in September, according to the office.
The inflation reading followed the Bank of England's decision to hold interest rates at 3.75% at its September meeting, with the Monetary Policy Committee voting 6–3, according to the meeting minutes. A November rate increase was already almost fully priced in before the price data, according to Reuters' coverage of labour market figures, and the higher-than-expected inflation reading reinforced those bets. Reuters reported on 21 October that money markets were almost fully pricing in a 25 basis point increase in November. Markets were pricing in 4 rate increases by mid-2027, according to London Stock Exchange Group data cited by Reuters, extending bets beyond the bank's next meeting. In foreign exchange markets, sterling rose 0.07% against the dollar to $1.3392 per pound at 09:10 GMT in trading on 21 October, according to Investing.com.
In its September assessment, the Bank of England had forecast inflation would reach around 3¾% in the final quarter of 2026. The bank compared that estimate with its previous forecast of 3.2% for the same period in its July report, marking an upward revision to the expected path of prices at year-end. On the release calendar, the Office for National Statistics scheduled publication of Britain's September retail sales data for 23 October 2026 at 7:00 a.m. UK time, according to the official announcement. The Bank of England's next interest rate decision is due on 5 November 2026, according to the schedule the bank published with its September monetary policy summary and meeting minutes. The Office for National Statistics scheduled the next consumer price inflation release for 18 November 2026.