Families and businesses are facing Bank of England interest rate hikes in the coming months, economists said, after inflation rose to the highest rate in almost a year.
Experts have said the latest inflation data from the Office for National Statistics (ONS) has reinforced expectations of a rate hike in November.
The ONS said Consumer Prices Index (CPI) inflation was 3.5 per cent in September, up from 3.1 per cent in August.
It means the price of goods and services across the economy are rising at a faster rate than they were before, and inflation is drifting further away from the Bank of England’s 2 per cent target rate.
A major driving force of higher inflation last month was motor fuel prices, which rocketed by 30% in the year to September, the latest figures showed.
Petrol and diesel prices have been surging since the start of the US-Israeli war with Iran which has squeezed global oil and gas supplies and driven up wholesale prices.
Living costs are expected to rise further in the months ahead as households face higher energy bills this winter.
Many economists are therefore expecting the Bank of England to hike interest rates next month to keep a lid on inflation and stem the risk of so-called “second-round effects” emerging, meaning things such as higher wage demands.
Martin Sartorius, lead economist for the Confederation of British Industry (CBI), said September’s inflation rise means an interest rate hike was “firmly on the table” at the Bank’s next meeting in November.
He said the rate-setting committee will likely want to “guard against the risk of persistently higher headline inflation becoming embedded in future wage and price-setting behaviour”.
Sanjay Raja, chief UK economist for Deutsche Bank, said further rises in energy prices were “inevitable” and that ongoing tensions in the Middle East were delaying the likelihood of inflation coming down.
He is expecting rates to rise in November and then again in the months ahead.
Nevertheless, Danni Hewson, head of financial analysis for AJ Bell, pointed to a “silver lining for households” in that food prices were “relatively stable” last month.
Food and drink inflation remained the same, at 1.3 per cent in the year to September, and prices fell by 0.2 per cent between August and September.
This was the first of two pieces of bad news for John Healey yesterday ahead of his Budget on Wednesday.
The second was that UK government borrowing rose by more than expected to £24.5bn for last month, underscoring the constraints in the public finances for the Chancellor.
The ONS reported that public sector net borrowing increased by £1.8bn compared with the same month last year.
It was also £1.9bn ahead of Office for Budget Responsibility (OBR) forecasts, and above the £24.1bn widely predicted by economists.
It comes only a week ahead of Mr Healey’s first Budget, where he is expected to increase bank taxes as higher borrowing costs weigh down on fiscal headroom.