UK Inflation Rises To 3.5% On Energy Costs; Bolsters Rate Hike Case

(RTTNews) - UK consumer price inflation strengthened more than expected in September as the Middle East conflict kept motor fuel prices high, reinforcing expectations for Bank of England rate hike next month.

Consumer prices registered an annual growth of 3.5 percent after rising 3.1 percent in August, the Office for National Statistics said Wednesday. The rate was the highest since last October and also came in above forecast of 3.4 percent.

Core inflation that excludes energy, food, alcohol and tobacco, accelerated to 2.8 percent in September, matching expectations, and up from 2.6 percent in the prior month.

The annual increase in goods prices advanced to 3.2 percent from 2.7 percent and services inflation rose to 3.7 percent from 3.4 percent.

Month-on-month, consumer prices grew 0.4 percent, slightly slower than the 0.5 percent rise seen in August. Prices were forecast to rise 0.3 percent.

Although inflation is on course to hit 4 percent this winter, there is still very little sign that the rise in energy prices is spilling into other parts of the inflation basket, ING economist James Smith said.

The economist expects interest rate hikes in both November and February. But by the spring, the Bank will be more confident in calling the 'all clear' on second-round effects, he said.

Smith forecasts the BoE to start cutting rates again by next November and into 2028. Confederation of British Industry Lead Economist Martin Sartorius said September's rise in inflation means that a rate hike will remain firmly on the table at the Monetary Policy Committee's next meeting.

"While there have been limited signs of higher energy costs feeding into domestic price pressures so far, the Committee will likely want to guard against the risk of persistently higher headline inflation becoming embedded in future wage and price-setting behavior," said Sartorius.

BoE is set to announce its policy decision on November 5. At 3.75 percent, the bank rate is the lowest since June 2023.

Another report from ONS showed that output price inflation hit the highest since April 2023 due to the sharp increase in refined petroleum products prices.

Factory gate prices were up 4.6 percent, following a revised 3.8 percent rise in August. On a monthly basis, output prices gained 0.8 percent after rising 0.7 percent a month ago.

Input price inflation also accelerated notably in September, reflecting the surge in crude oil prices. Input prices rose to a four-month high of 8.3 percent from 6.7 percent in August. Monthly input prices moved up 1.5 percent, up from a revised increase of 0.5 percent in the prior month.

In a separate communiqué, the ONS said average house prices climbed 0.9 percent in August from the last year, down from 1.2 percent in July. Annual inflation was negative in London, driven by large falls in the average price of flats.