The United Kingdom saw its inflation rate climb to 3.5% in the year leading up to September, marking its highest level in nearly twelve months. This figure sits above the Bank of England’s established 2% target. Economists had anticipated a lower rate, but increased costs for petrol and diesel pushed the numbers upward, with motor fuel prices specifically rising by 29.8% compared to the same period last year.
To track these economic trends, the Office for National Statistics (ONS) monitors a virtual basket of goods, which includes the prices of hundreds of everyday items such as food and fuel. Changes in this basket over a 12-month period are used to calculate the Consumer Prices Index (CPI). While food price inflation remained stable at 1.3%, authorities warn that supply chain dynamics mean fluctuations in food costs can take up to a year to impact retail prices, particularly given the instability caused by the war in Iran.
The Bank of England relies heavily on these inflation figures to manage the national economy, specifically when determining whether to maintain, lower, or increase the current base interest rate of 3.75%.
Higher interest rates are intended to curb inflation by making borrowing more expensive, which effectively reduces consumer spending and business demand. Giving people and businesses less money to spend, reducing demand for goods and slowing price rises, putting rates up makes borrowing more expensive. Making them less likely to create jobs, businesses also borrow less.
However, this policy presents a significant balancing act; higher borrowing costs can strain household mortgage repayments and deter businesses from hiring or investing, potentially harming economic growth. Some may cut staff and reduce investment.
Although the current 3.5% inflation rate is notably higher than the target, it remains well below the peak of 11.1% observed in October 2022, a time when global energy markets were heavily disrupted by Russia’s invasion of Ukraine. While inflation has cooled significantly since that 40-year high, the price level remains elevated rather than falling; the rate of increase has simply decelerated. For example, if a bottle of milk costs £1 but is £1.05 a year later, then annual milk inflation is 5%. And energy prices surged again when Russia invaded Ukraine, inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic.
Energy costs remain a primary concern for the inflation outlook. Prior to conflicts in the Middle East, official forecasts from March 2026 suggested inflation would hover around the 2% target for the next five years. However, the Bank of England cautioned in April that global energy market volatility could drive inflation as high as 6% in a worst-case scenario. While a recent ceasefire offered a temporary respite, market pressure returned when the US and Iran resumed hostilities in the Strait of Hormuz during July.
Looking ahead, inflation is projected to rise further due to the 4% increase in household energy bills that took effect on 1 October under the latest Ofgem price cap. In an effort to provide relief, Prime Minister Andy Burnham initiated the removal of VAT on household electricity bills, a move expected to exert minimal downward pressure on inflation figures.
To gain a clearer picture of the economy, the Bank of England also monitors “core inflation,” a metric that excludes volatile energy and food costs. Core CPI reached 2.8% for the 12 months ending in September 2026, marking an increase from the 2.6% recorded in the period ending in August.
