UK Inflation Rises to 3.5% as Energy Costs Strain Households and Businesses

UK — The United Kingdom’s inflation rate climbed to 3.5% in September, coming in above economists’ forecasts and increasing pressure on policymakers ahead of the government’s forthcoming budget.

Data released by the Office for National Statistics showed that consumer price inflation accelerated from 3.1% in August. The latest figure also exceeded the 3.4% increase predicted by economists surveyed by Reuters.

The Bank of England had earlier forecast a more modest increase to 3.0% in projections published in July.

Rising energy costs linked to the war involving Iran played a significant role in the acceleration. Higher petrol and diesel prices pushed inflation to its highest level since October 2025.

The latest figures create additional challenges for Finance Minister John Healey as he prepares his first budget, scheduled for October 28. The government must balance efforts to help households cope with rising living costs against the need to maintain control over public finances and meet fiscal rules.

Separate government data revealed that borrowing was higher than anticipated, while public debt exceeded £3 trillion, equivalent to $4.01 trillion. Costs associated with inflation-linked debt contributed to the increase, limiting the government’s financial flexibility.

September’s inflation reading also carries implications for welfare recipients because the government traditionally uses the figure to determine increases in welfare benefits.

The data indicate that inflationary pressures extend beyond household energy expenses. Both services inflation and core inflation increased, suggesting that price growth is not being driven solely by direct energy costs.

Businesses could also face higher operating expenses as fuel prices rise, particularly through transportation, distribution and production. Companies reliant on road transport or energy-intensive processes may experience greater cost pressures, while businesses selling directly to households must account for the potential impact of rising living expenses on consumer spending.

The inflation figures have also reinforced expectations that the Bank of England could increase interest rates for the first time in more than three years. Many analysts anticipate a possible rise to 4% on November 5.

An increase in interest rates could help curb inflation by raising borrowing costs. However, it would also make financing more expensive for households and businesses. Companies planning expansions, property investments or additional borrowing may need to reconsider their decisions if lending costs rise.

Additional producer price data highlighted growing pressures on manufacturers. Factory-gate prices rose by 4.6%, while input costs increased by 8.3% year over year.

These figures indicate that manufacturers are facing higher expenses before their products reach consumers. The extent to which those increases feed through to retail prices will depend on demand, competitive conditions and whether businesses can absorb some of the additional costs.

Healey’s budget must therefore navigate competing priorities, including support for households and the need for fiscal discipline. Economists anticipate cautious measures with limited effects on economic activity in the near term, while some more difficult fiscal decisions could be postponed until 2027.

The combination of higher inflation and borrowing leaves the government with less financial room to maneuver before its budget announcement. The figures have also drawn greater attention to the Bank of England’s next interest rate decision, especially if energy prices continue to push inflation higher.