UK inflation and borrowing climb before Healey’s first budget

British inflation and government borrowing both exceeded expectations last month, preparing the stage for finance minister John Healey's first budget presentation next week and the potential for a Bank of England interest rate increase. Consumer price inflation climbed to 3.5% in September, up from 3.1% in August, driven by surging energy costs due to the Iran war.

Economists had predicted a 3.4% annual increase, while the Bank of England had forecast a lesser 3.0% rise. This marked the highest inflation rate since October 2025. Government borrowing also surpassed forecasts, with public debt surpassing £3 trillion, primarily due to higher debt costs linked to inflation. Chancellor Healey will likely provide additional support for households impacted by energy price hikes in his budget, but his options are constrained by fiscal rules.

Analysts suggest a cautious budget with limited economic impact, leaving tough fiscal decisions for the next year. Inflation is closer to 4%, complicating efforts to mitigate the shock and raising concerns about its impact on wage and price-setting behavior. Rising employee wages further support arguments for the Bank of England's first rate hike in over three years, which many predict will occur on November 5 at 4%.