Inflation beats forecasts and hits a one-year high

British inflation rose more than expected in September 2026, with consumer prices up 3.5 percent in the 12 months to September, after a 3.1 percent increase in August, according to Office for National Statistics data reported by Reuters on 21 October 2026. Economists polled by Reuters had forecast a rise of 3.4 percent. The Bank of England had predicted a smaller rise to 3.0 percent in forecasts published in July, so the outturn was above both market and central bank expectations.

The Office for National Statistics said the increase was due to higher petrol and diesel costs, as the surge in energy prices caused by the Iran war gathered steam. The September rate took inflation to its highest since October 2025. September inflation also matters beyond the headline, because it is used by the government to set increases for welfare benefits, linking the figure to household incomes.

Pressure builds ahead of the Budget and rate decision

Figures in the same report showed the government borrowed more than forecast and public debt surpassed £3 trillion, fuelled by higher debt costs linked to inflation. That underlines Chancellor John Healey's constraints before his first Budget on 28 October. The Resolution Foundation described a double dilemma: easing cost-of-living pressures while keeping a lid on borrowing.

For interest rates, the data strengthens the case discussed by analysts for a Bank of England hike. The Bank said at its September meeting that it expected inflation to hit 3.75 percent between October and the end of the year, and to peak around 4.2 percent in the first quarter of 2027. Capital Economics said the higher borrowing figures reinforced its view of a cautious Budget with little net impact on the economy. This article is market news, not investment advice.