Inflation rate rises to 3.5% – industry reaction

Inflation rose to 3.5 per cent in September, according to the Office for National Statistics (ONS). The rise was higher than the earlier forecast of 3.4 per cent, amid continued energy pressures linked to the Middle East conflict 

September inflation rose from 3.1% to 3.5%, above the 3.4% forecast, with petrol and diesel leading the increase. Producer input costs climbed 8.3%, while manufacturers’ selling prices rose 4.6%. Markets expect a Bank of England rate increase on 5 November, although the decision remains ahead.

ONS Chief Economist Grant Fitzner 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. These were partially offset by the cost of hotel stays, where prices rose by less than this time last year.

“The annual cost of both raw materials and goods leaving factories continued to rise, driven by higher crude oil and petrol prices, respectively.”

Tamsin Powell, Consumer Finance Expert at Creditspring, said “Today’s inflation figure of 3.5% is a setback for households desperately looking for everyday cost pressures to ease. Prices are still rising, and that matters because many families are already managing budgets with very little room for unexpected costs.

“The headline figure only tells part of the story. After several years of higher prices across food, energy, transport and housing, people are feeling the cumulative effect on their day-to-day finances. Even a relatively small rise in inflation can make it harder to stay on top of essential spending and regular repayments. Our recent research found almost one in five people (18%) cut back on food or groceries to afford social plans this summer, and one in ten (10%) skipped meals altogether. When essentials are the first thing to give, there is very little room left to absorb further price rises.

“With the Autumn Budget around the corner, today’s figure is a clear reminder of what’s at stake for household finances. Any measures that ease the cost of essentials or give people more breathing room in their monthly budgets would be welcome. Changes that add pressure, even small ones, will be felt most by those already stretched.

“For households on tight budgets, the priority is to act early rather than wait for pressure to build or for the Budget to bring relief. Reviewing outgoings, planning for predictable bills and contacting providers as soon as payments start to feel difficult can make a real difference. Small, practical steps to make a budget more realistic and keep some flexibility in the month can help households stay in control while the outlook remains uncertain.”

John Phillips, CEO of Just Mortgages and Spicerhaart, said “Fuel forecourt price boards have provided consumers with a very visible reminder of inflationary pressures in recent weeks. The rise in CPI inflation to 3.5% reflects these renewed cost pressures, particularly around fuel and energy, against a continued backdrop of geopolitical uncertainty. The wider economic picture though remains mixed with the latest GDP figures showing the UK economy continuing to grow, suggesting that there is still some resilience despite the pressures facing households and businesses.

“Mixed is still probably the best way to describe the mortgage market as we continue to see lenders moving rates in both directions as they balance prudent pricing against the need to remain competitive. All eyes are now on next week’s Budget, with both borrowers and lenders looking for greater clarity on the Government’s plans. While this naturally causes some to pause as they await any positive announcements, there are still movers and buyers active in the market. As ever, expert advice remains critical in helping clients navigate an ever-changing market.”

Greg Thwaites, Interim Chief Economist at the Resolution Foundation, said “Rising inflation and record levels of debt illustrate the double dilemma facing the Chancellor – how to ease cost of living pressures for families while keeping a lid on Government borrowing.

“Inflation is already uncomfortably high, and it will get even worse in the coming months as the Energy Price Cap rises just as families start to put the heating on. Support with energy bills will be needed this winter.

“The support must be temporary and targeted given the state of the public finances. Borrowing is already off track this year, debt has hit £3 trillion, and markets are closely scrutinising the government’s ability to keep on top of the public finances.

“The Chancellor must confront this double dilemma head on in his Budget next week rather than duck reality.”

Owen Bassett, UK Risk Underwriting Manager at Atradius said “September’s rise in inflation to 3.5% shows that cost pressures remain a significant challenge for UK businesses.

“Atradius’s latest claims data shows claims received from insured UK businesses rose nearly 13% month on month in September. While claims can move for a range of reasons, the increase reinforces the importance of businesses keeping a close watch on customer payment behaviour.

“Higher prices do not affect every business in the same way. Companies with significant exposure to energy, fuel, imported goods or other volatile input costs can come under particular pressure where they are unable to pass those increases on to customers.

“That squeeze on margins can quickly become a cashflow issue. A business can remain profitable on paper but still struggle if rising costs mean the cash coming in is not sufficient to meet wages, financing costs and payments to suppliers as they fall due. 

“With businesses also looking ahead to next week’s Budget, managing costs and maintaining healthy cashflow will remain critical.”

Anna Leach, Chief Economist at the Institute of Directors, said “High energy costs continue to push up headline inflation, and put pressure on businesses, households and the resilience of the UK economy. But it is what is happening beneath the surface that matters most for the Bank of England’s next interest rate decision, and this data doesn’t really shift the dial for the Bank. Energy costs remain the main driver of inflation, and while underlying inflationary pressures in services and core inflation measures moved up, both have done so in line with Bank expectations. Meanwhile food price inflation has come in well below the levels expected. The labour market shows a mix of resilience and risk, with employment holding up and unemployment down, combined with further falls in vacancies among smaller businesses.

“For now, the Bank facing a finely balanced decision in November. Household inflation expectations have risen, and the longer that energy prices remain elevated, the greater the danger of higher inflation becoming embedded in wage and price-setting. But firms’ expectations for wages and prices have remained relatively stable, with costs so far largely eroding margins rather than pushing up prices. With borrowing costs already elevated, the Bank must weigh the risk of acting too late against that of unnecessarily weakening investment and employment. The case for a precautionary rate rise strengthens the longer that headline inflation remains elevated, but is not yet overwhelming.

“Meanwhile, persistently high inflation is adding to the pressures facing households and businesses. Next week’s Budget will need to tread a careful line. Targeted support for those most exposed to rising energy costs could help cushion the immediate shock, but how that support is funded matters. Further increases in the costs of doing business would undermine the very investment, hiring and economic resilience that the Government needs to protect.”

Suren Thiru, ICAEW Chief Economist, said “Inflation is tightening its grip on the UK economy as rising fuel prices pushed it uncomfortably above the Bank of England’s 2% target, deepening the financial squeeze on households and businesses.

“The rise in services and core inflation may heighten Bank of England fears that the Iran-induced energy spike is fuelling broader price pressures, though subdued wage growth should help curb any second-round effects.

“Inflation’s upward march is set to continue as September’s uptick is likely to have been followed by another jump in October, with higher energy prices lifting inflation towards 3.8%, before fresh energy bill rises in January drive it close to 4.5%.

“Rising inflation is turning the Budget into a perilous high-wire act for the Chancellor, 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. Policymakers will also be looking to the Chancellor to avoid adding fuel to the inflation fire by delivering a credible, fiscally disciplined Budget.”