UK inflation climbed to 3.5% last month alongside a worse-than-projected £24.5bn government deficit, delivering a dual blow to John Healey ahead of the upcoming budget. Just as Healey is also under increased financial pressure, the twin pieces of bad news underline the fact that consumers are facing a renewed cost of living squeeze. For instance, the 3.5% rise will uprate weekly child benefit by 95p, to £28 for the first child.
Data from the Office for National Statistics indicated that the annual consumer prices index increased from 3.1% in August, surpassing City forecasts of 3.4% largely due to escalating fuel expenses. The cost of clothing fell slightly and food prices growth remained steady at 1.3% as competition among supermarkets offset increases in transport costs, in better news for the chancellor. Rate setters are concerned that inflation will jump above 4% next year as the price of a wider range of goods increases in response to higher oil and gas prices.
Energy costs have escalated since late February following the US-Israel military action against Iran, which restricted petroleum flows through the Strait of Hormuz.
These heightened inflationary pressures have directly increased government borrowing expenses, representing the primary driver behind public finance deterioration since March.
Official records revealed that debt interest payments reached £10.9bn last month, marking the highest September figure in historical data and only the eighth time monthly costs surpassed £10bn.
Inflation-linked government bonds drove an additional £4bn into September debt servicing costs alone, pushing total public debt to an estimated £3tn for the first time, though debt as a share of GDP declined to 94%. From 95% a year ago, total government debt is estimated to have hit £3tn for the first time – although as a share of the size of the economy it has fallen to 94%.
Public sector net borrowing for the financial year reached £7.8bn, falling £4.4bn below the previous year but exceeding independent forecasts by £6bn. According to in the financial year so far, public sector net borrowing was £97.8bn, the ONS, – £4.4bn lower than last year, but still £6bn higher than the independent Office for Budget Responsibility had expected.
Motor fuels represented the single largest upward pressure on September inflation, with average petrol prices climbing by 8.2p per litre compared to a minor decline the prior year. The average price of petrol rose by 8.2p a litre from August compared with a fall of 0.2p in the same period last year. Diesel, which is often refined in the Middle East, rose by 10.7p a litre last month compared with a fall of 0.4p a litre in September 2025.
Diesel prices increased by 10.7p per litre, while air fares experienced a smaller post-summer decline than usual due to persistent fuel costs, though stable food prices and cheaper clothing offered minor offsets.
The stronger inflation figures heighten expectations that the Bank of England will increase interest rates from 3.7% during its November monetary policy committee meeting. Rising prices make it even more likely that the Bank of England will raise interest rates from their current 3.7% level when its monetary policy committee (MPC) meets next month. According to martin Beck, the chief economist at the consultancy WPI,, The higher than expected inflation rate meant it was almost inevitable that the MPC would raise interest rates when it met on 5 November, but he cautioned aga.
Furthermore, the September reading mandates an April welfare benefit increase aligned with the rate, while simultaneously elevating business rates in England to yield over £1bn in Treasury revenue. According to the tax firm Ryan, This could raise more than £1bn in extra receipts for the Treasury and would be paid mostly by organisations in the hospitality, leisure, education, health, transport and utility sectors.
With September wage growth recorded at 3.9%, the state pension is positioned to rise by that higher metric under the governing triple lock framework. Meaning that the state pension will almost certainly rise by the latter figure under the formula that dictates the triple lock, september’s CPI reading came in lower than the 3.9% wage growth figure for the three months to July.
Healey attributed the price surge to international conflicts, stating that Britain and global economies are absorbing pressures from Middle East and European hostilities while pledging a budget focused on regional growth. Healey blamed the inflation rise on the war in the Gulf. “We know that price rises from conflicts in the Middle East and Europe are hitting Britain and countries worldwide,” he said, adding that his budget would “drive for growth in every postcode” to improve living standards.
Economists at the National Institute of Economic and Social Research warned that consecutive months of rising inflation could persist through winter, potentially reaching 4% by early 2027. Given this, inflation could reach 4%, double the Bank of England’s target, by early 2027,” she said.
Analysts cautioned that further interest rate tightening risks damaging an already fragile economy without directly resolving underlying oil and gas supply constraints.
