UK inflation hits 3.5% as fuel surge fuels rate hike bets
U.K. inflation rose to 3.5% in the 12 months to September, a hotter-than-expected print driven by surging motor fuel costs. Economists polled by Reuters had forecast an annual rate of 3.4%.
The September figure marked the highest annual inflation reading in a year, continuing an upward trend from 3.1% in August and 2.9% in July. The U.K.'s Office for National Statistics reported on Wednesday that motor fuel inflation had reached its highest level since August 2022, when fuel costs spiked following Russia's full-scale invasion of Ukraine.
Britain's status as a net energy importer leaves it exposed to external shocks, including the U.S.-Iran conflict and the resulting difficulties in moving oil through the Strait of Hormuz. ONS data released Wednesday showed that U.K. motor fuel prices jumped 29.8% in the year to September.
Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, noted that recent growth in headline inflation has "undone the progress we saw in the spring." He added that Bank of England policymakers will look beyond the headline number, pointing to accelerating services inflation that raises concerns about second-round effects beyond energy prices. Gardner argued that the prolonged conflict is weighing on the economy and strengthening the case for a rate hike.
Market pricing reflects this shift in expectations. According to LSEG data, traders are pricing in a 98% probability that the Bank of England will raise its key interest rate by 25 basis points to 4% at next month's meeting. The majority of traders are also pricing in a further 25-basis-point increase at the central bank's final meeting of the year in December.
In immediate market reaction, the British pound remained flat against both the euro and the U.S. dollar following the data release. Yields on U.K. government bonds were also little changed.
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