U.K. inflation rose by a hotter-than-expected 3.5% in the 12 months to September, driven by the surging cost of motor fuels.
Economists polled by Reuters had been forecasting an annual inflation rate of 3.4%.
September's print marked a continuation of the U.K.'s upward trend for inflation, which came in at 3.1% in August and 2.9% in July. The September reading was the highest annual inflation figure in almost a year.
The U.K.'s Office for National Statistics said on Wednesday that the motor fuel inflation rate had hit its highest level since August 2022, when fuel costs surged in the wake of Russia's full-scale invasion of Ukraine.
Britain is a net energy importer, making it vulnerable to external energy shocks, such as the U.S.-Iran war and the subsequent struggle to move oil through the Strait of Hormuz.
U.K. motor fuel prices surged 29.8% in the year to September, ONS data showed on Wednesday.
The British pound was flat against both the euro and the U.S. dollar following the data release, and yields on U.K. government bonds were also little changed.
Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said in a note Wednesday morning that recent growth in headline inflation had "undone the progress we saw in the spring."
"Bank of England policymakers will be looking beyond the headline figure," he said. "Services inflation, in particular, has accelerated in recent months which will create concern that we are starting to see second round inflationary effects beyond energy prices. While we face a different set of challenges compared to 2021, the prolonged conflict is weighing on the U.K. economy and making the case for a rate hike stronger."
Markets are pricing in a 98% chance that the Bank of England raises its key interest rate by 25 basis points to 4% next month, according to LSEG data, with the majority of traders also pricing in a further hike of the same size at the central bank's final meeting of the year in December.
Budget headache
Wednesday's expected rise in inflation also complicates the fiscal picture for the U.K. government and its finance minister.
Chancellor of the Exchequer John Healey is set to unveil his first fiscal shakeup next week during the U.K.'s hotly anticipated Autumn Budget.
He is tasked with sticking to the previous government's so-called fiscal rules, which aim to rein in public debt while delivering on promises to soften the blow of surging consumer costs.
But separate data published Wednesday showed the U.K.'s national debt was estimated to have exceeded £3 trillion ($4 trillion) in September for the first time. The cost of servicing those debts has risen drastically over the past year, and the British economy is struggling to grow.
Healey said in a statement following Wednesday's data release that he would be "maintaining our fiscal discipline" in the budget next week, while working to "drive for growth [and give] businesses and families some breathing space."
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said in a note Wednesday morning that rising inflation is turning the Autumn Budget into "a perilous high-wire act for the Chancellor."
He said surging prices were "increasing pressure for cost-of-living support while pushing up government borrowing costs, which is shrinking fiscal headroom and narrowing his policy options."
"With inflation increasing, the pieces are falling firmly into place for a November rate rise," he said. "Policymakers will also be looking to the Chancellor to avoid adding fuel to the inflation fire by delivering a credible, fiscally disciplined Budget."
