What is happening to UK prices?

Inflation in the United Kingdom climbed to 3.5% in the year ending September, marking the highest level in nearly a year and surpassing the Bank of England's 2% target. This increase was slightly higher than what economists had anticipated, primarily due to surging petrol and diesel costs. Experts predict that inflation will continue to rise in the months ahead.

Inflation refers to the upward price movement of goods and services over time. For instance, if a milk bottle costs £1 now and £1.05 a year later, its annual inflation rate would be 5%. The Office for National Statistics (ONS) monitors the prices of numerous everyday items, such as food and fuel, to track inflation. This virtual "basket of goods" is routinely updated to reflect changing shopping habits, with additions like alcohol-free beer, dashboard cameras, and pet grooming equipment in 2026, while premium bottled lager and wrapping paper sheets were removed.

The ONS calculates inflation by examining price changes in the basket of goods over the past 12 months, with the latest figure released monthly. The Bank of England closely examines these figures when determining whether to raise, lower, or maintain its base interest rate, which currently stands at 3.75%. Raising rates makes borrowing more expensive, limiting people's and businesses' spending power, thereby reducing demand for goods and curbing price hikes.

However, increasing borrowing costs also risks damaging the economy. Higher mortgage repayments, for example, could offset the benefits of improved savings options. Businesses may borrow less, making them less inclined to hire or invest. Despite the 3.5% CPI inflation rate being above the Bank's 2% target, it remains far below the 11.1% peak reached in October 2022 amid soaring gas and oil prices following Russia's invasion of Ukraine.

While inflation has fallen since then, prices have not fallen as much, merely rising at a slower pace. The September figure was mostly driven by higher motor fuel prices, which surged by 29.8% compared to the same period last year. Food price changes may take a year to trickle down to consumers due to complex supply chains, so food prices could still increase due to ongoing disruptions from the Middle East conflict.

Inflation surged in 2022 due to heightened demand for oil and gas after the Covid pandemic, followed by another energy price surge when Russia invaded Ukraine. Prior to the conflict, UK inflation was forecast to be around the 2% target over the next five years, according to official forecasts from March 2026. However, in April, the Bank of England warned that global energy market disruptions could push UK inflation as high as 6% in the worst-case scenario.

The recent ceasefire may help curb further inflation hikes. Oil prices dropped sharply after the ceasefire announcement but have since rebounded as US and Iranian attacks resumed in the Strait of Hormuz. Consequently, UK petrol prices are expected to climb again. This, combined with a 4% increase in household energy bills from October 1st when the Ofgem price cap took effect, is likely to further elevate UK inflation.

Prime Minister Andy Burnham's pledge to provide a "breathing space" for households grappling with the cost of living crisis includes scrapping VAT on household electricity bills, which is expected to have a modest downward impact on inflation. Inflation is largely driven by volatile food and energy prices, so the Bank of England also considers other economic indicators, such as core inflation, which excludes these costs.

Core CPI stood at 2.8% in the 12 months to September 2026, up from 2.6% in the same period the previous year. The Bank of England Governor Andrew Bailey indicated that energy price volatility increases the likelihood of further interest rate hikes if oil prices do not decline. The Bank also closely monitors wage growth and unemployment rates.

Recent data shows that UK regular pay grew ahead of inflation over the three months to August, with average annual non-bonus pay increasing by 3.7%. After accounting for inflation, this translates to a 0.8% rise in regular pay between June and August. Meanwhile, the US and eurozone countries have been grappling with inflation as well, with the EU's inflation rate reaching 3.8% in September, up from 3.2% in August.

The European Central Bank (ECB) raised interest rates twice recently to 2.5%, citing "too high" inflation. In the US, inflation climbed to 3.7% in September, up from 3.4% in August, also influenced by higher fuel costs. The Federal Reserve raised interest rates for the first time in three years in September, citing "too high" inflation, despite opposition from President Donald Trump, who had called for rate cuts.