UK inflation hits 3.5% in September on fuel costs; BoE hike seen in November

UK inflation climbed to 3.5% in September, driven largely by soaring fuel prices, surpassing the 3.4% forecast. The increase in fuel inflation alone added around 0.2 percentage points to the Consumer Price Index (CPI). Core inflation, excluding volatile food and energy costs, rose to 2.8% from 2.6%, aligning with expectations. Services inflation followed suit, reaching 3.7% from 3.4%, though an economist noted that airfare inflation may have exaggerated this rise.

Food and drink prices remained stable at 1.3% for the third consecutive month. Economists are divided on whether the higher energy costs will trickle down to other sectors. While some see tentative signs of this effect, others remain unconvinced. Deutsche Bank's Chief UK Economist, Sanjay Raja, believes underlying inflation trends are on the rise.

Webull UK CEO Nick Saunders warns that diesel prices near £2 per liter could severely impact haulage and agriculture, potentially triggering a second wave of inflation if it persists. The Chancellor may raise £4 billion through additional VAT on fuel, providing room in the Budget for assistance. The Bank of England is widely expected to raise interest rates in November, with Capital Economics and ING forecasting headline inflation to peak at 4% this winter.

Both analysts anticipate a Bank Rate peak of 4.25% by November, slightly lower than the 4.75-5.00% market expectations. If energy prices decline next year, Capital Economics expects a quarter-point rate hike and ING predicts further increases, potentially cutting by November.