UK inflation rises to 3.5 per cent as public debt passes £3trn

UK inflation rose to 3.5 per cent in September, its highest rate for 11 months, as separate figures published today by the Office for National Statistics (ONS) showed public sector debt passing £3trn for the first time, a week before the chancellor John Healey delivers his first budget.

The rate was up from 3.1 per cent in August and above the 3.4 per cent analysts had expected. The September reading is typically used to calculate the rise in benefits the following April.

The ONS also said the government borrowed £24.5bn in September, up from £17.3bn in August and above the £23.9bn analysts had forecast.

Borrowing between April and September reached nearly £100bn, according to the ONS public sector finances bulletin. That was £6bn more than the Office for Budget Responsibility (OBR) forecast at the spring statement in March, although £4.4bn lower than in the same period last year.

Public debt exceeded £3trn for the first time, the ONS said, although debt was lower as a proportion of the economy than a year earlier. Borrowing had already overshot the OBR’s forecast in July.

The government paid £10.9bn in interest on public debt in September, up from £8.9bn in August and the highest figure for that month since records began in 1997.

The OBR is widely expected to say that debt interest spending will exceed £100bn every year until at least the 2030s when it publishes new economic forecasts alongside the budget on 28 October, more than the entire education budget.

Healey is expected to increase taxes on banks in the budget, amid an erosion of the UK’s fiscal headroom since the start of the Middle East war. Economists warned last month that he would need to find about £10bn in tax rises or spending cuts after government borrowing costs reached a 19-year high.

Experts said the increase was primarily driven by higher petrol and diesel prices, linked to disruption to global fuel markets caused by the Gulf conflict, now nearly in its ninth month.

Grant Fitzner, chief economist at the ONS, said: “Inflation climbed notably in September to its highest annual rate in almost a year. Increased fuel prices were again the main driver, with the cost of diesel the highest since July 2022.

“Other upward pressures included airfares and, to a lesser extent, computer games and live events, which are often volatile.”

He added that smaller increases in the cost of hotel stays than a year earlier tempered the rise in headline inflation.

Services inflation, which the Bank of England examines closely, rose to 3.7 per cent in September from 3.4 per cent in August. Core inflation, which strips out volatile food and energy prices, climbed to 2.8 per cent from 2.6 per cent.

Traders had already increased bets on a rise in interest rates to 4 per cent from 3.75 per cent at the Bank’s next meeting on 5 November after figures published yesterday showed unemployment fell to 4.7 per cent, below economists’ forecasts.

Yael Selfin, chief economist at KPMG UK, said: “Higher inflation, with more in the pipeline, could lead the Bank of England to raise interest rates next month as an insurance measure.”

Sanjay Raja, chief UK economist at Deutsche Bank, said: “The case for insurance hikes … is gaining momentum, particularly with the inflation normalisation process likely to be delayed further by ongoing tensions in the Middle East.”

The Bank expects inflation to exceed 4 per cent in the first months of next year amid predictions that household energy bills will increase by as much as 20 per cent. Inflation has been above the Bank’s 2 per cent target for two years.

Healey is likely to announce additional cost of living support for families in the budget, partly funded by higher taxes on profits made by banks.

Responding to today’s data, the chancellor said the wars in the Middle East and between Russia and Ukraine were “hitting Britain and countries worldwide”.

The pound fell by 0.06 per cent to $1.33 after the figures, while the yield on the benchmark 10-year gilt edged down by 0.01 percentage points to 5.41 per cent. Brent crude rose by just over 1 per cent to $109 a barrel.

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