Britain’s inflation rate accelerated sharply in September, adding pressure on Chancellor John Healey ahead of next week’s Autumn Budget and complicating the government’s plans to support growth while managing higher borrowing costs.

The Office for National Statistics said consumer-price inflation rose to 3.5% in the year to September, up from 3.1% in August. The increase came as ministers prepare to set out tax and spending plans on 28 October, with households and businesses already facing weaker confidence and elevated costs.

Inflation raises pressure before Budget

The figures are likely to intensify scrutiny of the government’s fiscal strategy. Higher inflation can prolong pressure on interest rates, increase the cost of servicing government debt and squeeze household spending power.

September retail sales volumes fell 0.4%, according to reporting collated on Sunday, underscoring the tension between rising prices and fragile consumer demand. Business activity, however, was reported to have strengthened in October, with a composite purchasing managers’ index reaching an eight-month high of 53.1 as new orders improved and hiring resumed.

The mixed data leaves the chancellor balancing competing priorities: supporting investment and productivity without adding to inflationary pressure or undermining confidence in the public finances.

State-backed lenders set for major capital injection

Against that backdrop, Healey is expected to announce an additional £20.4bn of capital for two state-backed institutions in the Budget. The National Wealth Fund is expected to receive £15.4bn, while the British Business Bank could receive £5bn over five years.

The proposed funding is intended to increase lending and investment in infrastructure, smaller companies and growth sectors. Supporters argue that using public financial institutions could mobilise private capital while keeping spending focused on long-term economic capacity.

Critics are likely to question the scale of the commitment at a time when borrowing costs remain high and the government is seeking to preserve room against its fiscal rules. The inflation figures make that debate more acute because additional demand-side support could face closer scrutiny.

Banks face possible tax increase

Separately, British banking shares fell after reports that the government was considering raising the bank surcharge in the Budget. Reversing the previous reduction from 8% to 3% could raise about £2.25bn a year, according to reporting cited in market coverage.

Barclays, Lloyds and NatWest were among the lenders affected by the speculation, with Lloyds and NatWest reported to have fallen about 2% in morning trading. Trade unions have backed a higher contribution from banks, while the industry has warned that increased taxation could weaken the UK’s competitiveness.

The combination of faster inflation, softer retail demand and uncertainty over taxation has put the Budget at the centre of the economic outlook. Businesses and investors will be watching for whether the chancellor prioritises immediate fiscal restraint or uses state-backed finance and targeted reforms to pursue longer-term growth.