Inflation rises to 3.5 per cent as fuel costs surge

Inflation rose to 3.5 per cent last month and government borrowing was worse than expected, in a double blow for the chancellor, John Healey, a week before his budget.

The Office for National Statistics said the annual rate of consumer price inflation rose from 3.1 per cent in August, beating City forecasts of 3.4 per cent. The biggest single factor was the cost of fuel, which has soared since the US and Israel went to war with Iran at the end of February, choking the flow of oil and gas through the Strait of Hormuz.

Petrol and diesel

The average price of petrol rose by 8.2p a litre between August and September, compared with a small fall a year earlier. Diesel, much of which is refined in the Middle East, rose by 10.7p a litre. Air fares, which are closely tied to fuel prices, fell by much less than usual after the summer peak.

There was better news on clothing, which fell slightly in price, and food, where price growth held steady at 1.3 per cent as supermarket competition offset higher transport costs.

Record interest bill

Separate figures showed the government borrowed £24.5bn in September, more than forecast. It paid £10.9bn in interest on its debt, the highest September figure on record, partly because payments on some government bonds rise with inflation. The ONS said higher inflation alone had added £4bn to the bill.

Total government debt is estimated to have passed £3tn for the first time, although as a share of the economy it has fallen to 94 per cent from 95 per cent a year ago. Borrowing so far this financial year stands at £97.8bn, £4.4bn less than last year but £6bn more than the Office for Budget Responsibility expected.

What it means for households

September's figure is the one used to set many benefit rises from next April, so most working-age benefits will go up by 3.5 per cent. Weekly child benefit for a first child will rise by 95p to £28. The state pension is likely to rise by 3.9 per cent, in line with earnings growth, under the triple lock.

It also means a bigger than expected rise in business rates in England. The tax firm Ryan said this could bring in more than £1bn extra, mostly from hospitality, leisure, education, health, transport and utility firms.

Interest rates likely to rise

The figures make it more likely that the Bank of England will raise interest rates from 3.7 per cent when it meets on 5 November. Charlotte O'Leary, of the National Institute of Economic and Social Research, said inflation could reach 4 per cent, double the Bank's target, by early 2027, as higher transport costs feed into food prices and January's energy price cap rise lands.

Martin Beck, chief economist at WPI, warned against going too far. "Raising interest rates cannot produce more oil or gas, and further tightening risks weakening an already fragile economy," he said.

Mr Healey blamed the war in the Gulf. "We know that price rises from conflicts in the Middle East and Europe are hitting Britain and countries worldwide," he said, promising that his budget would "drive for growth in every postcode".