UK inflation rises by more than expected to 3.5% as war drives up fuel prices

UK inflation climbed by more than expected in September to 3.5% after a surge in prices from the conflict in the Middle East that has pushed up the cost of diesel to record levels.

In a blow to John Healey before his first budget as chancellor in a week’s time, the Office for National Statistics said annual inflation rose from 3.1% in August. Economists had forecast an increase in the consumer prices index (CPI) to 3.4%.

Oil and gas prices have soared since the end of February, when the US and Israel launched their war on Iran, throttling gas and oil flows through the strait of Hormuz.

The ONS said a rise in the cost of motor fuels was the single largest factor pushing up inflation in September. The average price of petrol rose by 8.2p a litre between August and September 2026 compared with a fall of 0.2p in the same period last year.

Diesel, which is often refined in the Middle East, rose by 10.7p a litre in September 2026 compared with a fall of 0.4p a litre in September 2025. Air fares, which are heavily affected by the price of fuel, dropped in September by much less than usual after the traditional summer peak.

In better news for the chancellor, the cost of clothing fell slightly and food prices growth remained steady at 1.3% as competition among supermarkets offset increases in transport costs.

Separate official figures on Wednesday showed the monthly budget deficit increased to £24.5bn in September, as inflation pushed up the government’s interest bill – underlining the challenges Healey faces in balancing the books.

The UK’s total debt has now hit £3tn for the first time, the data revealed – though it is lower as a share of GDP than a year ago.

Last month’s jump in the CPI makes it even more nailed on that Bank of England officials will raise interest rates from their current 3.7% level when they meet next month. Rate setters are concerned that inflation will jump above 4% next year as the price of a wider range of goods increases in response to higher oil and gas prices.

September’s CPI reading commits the chancellor to raising most working-age welfare benefit payments from next April by more than expected. For instance, the 3.5% rise will uprate weekly child benefit by 95p to £28 for the first child.

It also means a bigger than forecast inflation-linked rise in business rates in England. The tax firm Ryan said this could raise more than £1bn in extra receipts for the Treasury and would be paid mostly by organisations in the hospitality, leisure, education, health, transport and utility sectors.

September CPI’s came in lower than the 3.9% wage growth figure for the three months to July, meaning that the state pension will almost certainly rise by the latter figure under the formula that dictates the triple lock.

Healey blamed the inflation rise on the war in the Gulf: “We know that price rises from conflicts in the Middle East and Europe are hitting Britain and countries worldwide,” he said, adding that his budget would “drive for growth in every postcode” to improve living standards.

Charlotte O’Leary, an economist at the National Institute of Economic and Social Research, said the recent run of three months of rising annual inflation was likely to continue through the winter, even if there was some resolution to the conflict in the Middle East.

“Higher fuel and transport costs will likely push up food prices, and January’s large price cap increase will land as household energy demand peaks. Given this, inflation could reach 4%, double the Bank of England’s target, by early 2027,” she said.

Healey will want to use next week’s budget to relieve the pressure on struggling households, but with gilt yields – effectively the interest rate on government debt – at multidecade highs, rising borrowing costs limit his room to manoeuvre.

Martin Beck, the chief economist at the consultancy WPI, said the higher than expected inflation rate meant it was almost inevitable that the Bank of England would raise interest rates when they meet on 5 November, but he cautioned against persistent rises in the cost of borrowing.

“Raising interest rates cannot produce more oil or gas, and further tightening risks weakening an already fragile economy,” he said. “An increase now looks increasingly likely, but investors pricing in four hikes over the coming year risk underestimating how quickly an improvement in the international climate could change the inflation outlook.”