The UK’s Consumer Price Index (CPI) increased 10 percentage points ahead of expectations, jumping from 3.1% to 3.5% over 12 months to September 2026, according to data published today (21 October) by the Office for National Statistics (ONS).
Elsewhere, the CPIH – with includes owner occupiers’ housing costs – rose from 3.3% to 3.6%, compared with last month’s data. On a monthly basis, CPIH rose by 0.4% in the month of September alone, quadrupling the 0.1% increase experienced during the same month last year.
Core CPIH – which excludes food, energy, alcohol and tobacco but includes housing costs – rose by 3.1% over 12 months to September, compared with 2.9% over 12 months to August. Meanwhile, core CPI – which excludes both housing costs, as well as food, energy, alcohol and tobacco – rose by 2.8%; a 20 basis-point uptick compared with last month’s data.
Transport costs, largely petrol, made the largest inflationary contribution at 0.2%. Recreation and culture, and housing & household services, each made the second and third-largest contributions, respectively, at more than 0.05% each. Restaurants and hotels made the largest downward contribution to inflation, at 0.03%.
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Commenting on the data, Neil Birrell, CIO of Premier Miton, said CPI movements are “less good news” than the more robust employment data published yesterday (20 October).
“Rising fuel costs were a known contributor, but the inflation rate is higher than expected, jumping to an 11-month high. This will give the Bank of England and the government food for thought as energy prices stay elevated, putting pressure on the price of goods and services across the board,” he warned.
Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said the higher-than-expected jump in inflation is “a pre-Budget dose of reality as price pressures filter through the economy”.
“Since the conflict began, the services and manufacturing industries have faced rising input costs, and we’re now starting to see more of that passed on to customers through higher prices,” he said.
“On the other side of the coin, food inflation eased marginally in September which will provide some relief to households. However, that relief might prove to be short-lived for shoppers as higher energy, fertiliser, and commodity prices filter through into supermarket prices.”
Gardner said it is services inflation which will create concern regarding second-round inflationary effects beyond energy prices.
“While we face a different set of challenges compared to 2021, the prolonged conflict is weighing on the UK economy and making the case for a rate hike stronger.”
Richard Carter, head of fixed interest research at Quilter Cheviot, agreed that both core and services inflation ticking higher present “less comfortable signs” than the widely-expected transport cost increases.
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“The longer the conflict in the Middle East persists, the greater the risk that higher energy costs seep into other areas of the economy,” he said. “The Bank of England expects inflation to move slightly above 4% in early 2027, and that backdrop is not particularly conducive to any easing of interest rates.
“Indeed, today’s figures will strengthen the case of those on the Monetary Policy Committee who believe higher rates may be needed to prevent the energy shock becoming embedded in wider prices and wages.
“Economic growth has remained resilient to date this year, but should rates rise, these are likely to bite in 2027 and hold the economy back as the Bank continues its inflationary battle.”
Public finances – a bigger problem?
However, Carter noted the UK government’s borrowing figures, also released today, shows that headwinds “extend well beyond the immediate inflationary picture”.
“The public sector borrowed £24.5bn in September, £1.8bn more than a year earlier and £1.9bn above forecast. Borrowing has now reached £97.8bn in the first six months of the financial year, £6bn more than the OBR expected,” he said.
“The £3trn debt barrier has also now been broken for the first time, while £10.9bn was spent on debt interest in September alone.
“Those numbers illustrate the difficult circle the government is attempting to square. It wants to pursue an ambitious long-term spending programme while borrowing costs and existing debt are already placing significant demands on the public finances.”
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Susannah Streeter, chief investment strategist at Wealth Club, said the stark borrowing figures make it look more likely that “there won’t be many tricks or treats stored in the red box and that the Chancellor will opt for a highly cautious Budget, with tougher fiscal choices left lurking until next year”.
“Right now, there’s little respite around the corner for inflation, given that the war in the Middle East appears even more entrenched,” she warned.
“Brent crude, the benchmark, has risen again, staying stubbornly above $110 a barrel. Oil prices have risen by more than 10% this month as Saudi Arabia has been dragged deeper into the conflict following unrelenting attacks by Houthi rebels.
“Strikes on vessels using the Strait of Hormuz have also intensified. There had been hopes that mediation talks with Iranian officials led by Pakistan would help resolve the situation, but any potential deal still looks as though it’s far on the horizon.”
