UK inflation jumps to 3.5%, and the rise is spreading

What happened

Consumer prices in the UK were 3.5% higher in September than a year earlier, up from 3.1% in August, according to figures published by the Office for National Statistics on 21 October. Economists had expected 3.4%.

Core inflation, which leaves out energy, food, alcohol and tobacco, rose to 2.8% from 2.6%.

Why the core number matters

In August, most of the rise in inflation came from motor fuel. A jump driven by fuel can fade quickly if oil prices fall back. Core inflation is different: it tracks prices set inside the economy, such as services and wages, which change more slowly and are harder to bring down.

When core inflation rises alongside the headline figure, it suggests higher energy costs are being passed on more widely. That is the pattern central banks worry about most.

Where it sits in the chain

This is link 1: an inflation surprise. The next step is the central bank’s reaction. At its last meeting on 17 September, the Bank of England kept Bank Rate at 3.75%, but three of its nine policymakers voted to raise it to 4.00%. With inflation now higher than expected, markets expect a rise at the next meeting.

The real policy rate, Bank Rate minus inflation, is now only 0.25%. In real terms, policy is barely restrictive, which strengthens the case for a hike.

What to watch

• The Budget on 28 October, which could change prices directly through taxes and duties.
• The Bank of England decision on 5 November, and how many members vote to raise rates.