UK inflation accelerated more than expected in September, strengthening market expectations that the Bank of England may raise interest rates next month as households and businesses face renewed energy-cost pressure.

The Consumer Prices Index rose 3.5% in the year to September, up from 3.1% in August and above economists’ median forecast of 3.4%. The increase marks an 11-month high and puts inflation further above the Bank’s 2% target.

Rate-rise expectations strengthen

Financial markets are now pricing in a rise in Bank Rate to 4% in November, which would be the first increase in three years. The shift reflects concern that higher energy prices, linked to the Iran war, could prove more persistent than previously expected.

Bank of England governor Andrew Bailey and other policymakers have said the energy shock has so far had a limited effect on broader inflation. However, they have also indicated that the case for higher rates is becoming stronger if elevated energy costs continue.

Pressure on households and companies

The latest figures add to the financial strain facing consumers, who are already contending with higher household bills and borrowing costs. For businesses, a higher interest-rate environment would increase financing expenses and could weigh on investment and demand.

Tuesday’s labour-market data showed signs of stabilisation, potentially reinforcing the case for action by the central bank. Policymakers must now balance the risk of allowing inflation to become entrenched against the danger of weakening an economy already under pressure.

Wider business implications

The inflation figures come as the government prepares its first Budget under Chancellor John Healey. Business confidence is already being tested: UK-listed companies issued 65 profit warnings in the third quarter, the highest total since late 2024, according to EY-Parthenon.

A November rate rise would increase the cost of corporate borrowing and could further complicate decisions on hiring, expansion and capital spending. It would also raise the government’s debt-servicing costs as gilt yields and refinancing requirements respond to the changing interest-rate outlook.

The Bank’s next decision will depend on whether September’s increase is viewed as a temporary energy-driven shock or evidence that inflationary pressure is broadening. For now, the data have made a near-term rate increase substantially more likely.