Inflation jumped to 3.5 per cent in the 12 months to September as the UK economy looks set to suffer the damaging effects of energy price increases caused by the Iran war over the coming months. 

The consumer price index (CPI) reading rose above market expectations. This was also above last month’s figure of 3.1 per cent. 

The country is now expected to suffer acceleration in price growth after a sharp rise in oil prices since the Iran war began in late February began to filter through to the cost of goods and services for British households. The Brent crude oil price, an international benchmark, has jumped between $95 per barrel and nearly $100 per barrel this month, far above a level of around $70 before the US and Israel launched strikes in Iran.

The Bank of England previously warned that inflation would exceed four per cent, with a projected increase in prices over the winter months set to add to pressure on Chancellor John Healey ahead of next week’s Budget. 

David Rees, head of global economics at Schroders, said the UK economy was “facing a perfect storm of imported inflation pressures”.

“Today’s rise in headline inflation was always going to be energy-led, but food and manufactured-goods prices look set to climb in the months ahead, pushing CPI towards four per cent”.

“Inflation climbed notably in September to its highest annual rate in almost a year,” Grant Fitzner, chief economist at the Office for National Statistics, said.

“Increased fuel prices were again the main driver, with the cost of diesel the highest since July 2022. Other upward pressures included airfares and, to a lesser extent, computer games and live events, which are often volatile.”

Chancellor John Healey said: “We know that price rises from conflicts in the Middle East and Europe are hitting Britain and countries worldwide.

“Last week the IMF said our UK fiscal discipline stands out with the lowest forecast deficit in the G7 by 2029. And today we’ve given the green light to getting North Sea gas from the Jackdaw field, investing the revenues in our clean energy future and supporting British workers.”

“In my Budget next week, I will keep up this momentum. Maintaining our fiscal discipline and drive for growth in every postcode, while giving businesses and families some breathing space.”

Inflation pressures in UK economy build up

Beneath the higher rate of inflation, the Office for National Statistics said services inflation edged up to 3.7 per cent while core inflation, which strips volatile items such as energy, rose by 2.8 per cent per cent in the last 12 months, up from 2.6 per cent in August.

City economists had long warned that a spike in global oil prices would slowly ripple through the economy given delays on the energy price cap and the time it takes for businesses to pass additional costs onto consumers. 

The Bank of England’s Monetary Policy Committee is particularly concerned about “second round effects”, where higher costs lead to workers bargaining for pay rises, causing a spiralling effect for prices. 

The Bank has so far opted to leave interest rates unchanged at 3.75 per cent. City forecasters believe the MPC could vote for monetary policy to be tightened at its next meeting in November, lifting interest rates to four per cent. 

Alongside its monetary policy decision, the Bank will provide new forecasts on inflation and price pressures that exist within the UK economy. 

Economists at Schroders said an interest rate hike was a “done deal” following a week of difficult data for the UK economy’s inflation outlook.

Yael Selfin, chief economist at KPMG, said: ““Higher inflation, with more in the pipeline, could lead the Bank of England to raise interest rates next month as an insurance measure.”

Its decision will come a week after the Budget. Healey is facing calls to ease worries over inflation with new spending packages as he has repeatedly said he wanted to provide “breathing space” to businesses and households.