UK inflation and borrowing climb before Healey’s first budget

By Suban Abdulla

LONDON, Oct 21 (Reuters) - British inflation and borrowing rose more than expected last month, according to data that will add to calls for help for households in finance minister John Healey's first budget next week and the likelihood of a Bank of England interest rate hike.

Consumer price inflation rose to 3.5% after a 3.1% increase in August, the Office for National Statistics said on Wednesday.

Economists polled by Reuters had forecast a rise of 3.4% in the 12 months to September as the surge in energy prices caused by the Iran war gathered steam. The BoE had predicted a smaller rise to 3.0% in forecasts it published in July.

Last month's increase, which the ONS said was due to higher petrol and diesel costs, took inflation to its highest since October 2025.

The September inflation rate is traditionally used by the government to set increases for welfare benefits.

Separate figures showed the government borrowed more than forecast and public debt surpassed £3 trillion ($4.01 trillion), fuelled by higher debt costs which are linked to inflation and underlining the constraints facing Healey.

He is expected to offer some further support for households hit hardest by the jump in energy prices, but his options are limited by the government's fiscal rules.

"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," Greg Thwaites, interim chief economist at the Resolution Foundation, said.

Ruth Gregory, deputy chief economist at Capital Economics, said the higher-than-expected borrowing in recent months "reinforces our view that the chancellor will deliver a cautious budget on October 28 that has little net impact on the economy and leaves the toughest fiscal choices for next year."

UNDERLYING PRICE PRESSURES SPEED UP

Britain relies heavily on imported natural gas and the BoE is watching to see how much the energy price shock feeds into the broader economy.

Services price inflation jumped to 3.7% from 3.4% in August and was slightly higher than economists' forecasts of 3.6%.

Excluding food, energy, alcohol and tobacco, inflation picked up to 2.8% from 2.6% and was also above expectations.

"Inflation moving closer to 4% makes it harder to simply look through the shock," Adam Deasy, economist at PwC UK, said.

"The higher and longer inflation stays elevated, the greater the risk that it starts to influence wage and price-setting behaviour and the riskier it becomes to continue to wait for definitive evidence of those 'second-round' effects."

BOE ON TRACK FOR RATE HIKE

Figures released on Tuesday showed a pickup in wage growth, adding to the case for a first interest rate hike by the BoE in over three years.

Governor Andrew Bailey and other policymakers say the likelihood of a rate hike grows the longer that energy ​prices stay high, although they say there has been a limited impact so far on inflation.

But Megan Greene, who has favoured a hike in rates, said on Tuesday that the risks of a pickup in broader inflation from the energy price shock were greater than expected.

Investors and many analysts expect the BoE to raise its benchmark Bank Rate to 4% on November 5.

Separate data released by the ONS hinted at inflation pressures in the pipeline. Factory gate prices rose by 4.6% in the 12 months to September, the biggest increase since April 2023 and up from 3.8% in August.

Manufacturers' input costs rose by 8.3% after an increase of 6.7% in August, above the Reuters poll forecast of a 7.2% rise.

(Reporting by Suban Abdulla; graphic by Pasit Kongkunakornkul; Editing by William Schomberg and Andrew Heavens)