UK inflation jumps to 3.5% as oil climbs back above $110
UK inflation rose faster than expected to 3.5%, its highest in almost a year, as petrol and diesel prices surged. The figures all but lock in a Bank of England rate rise early next month, while Brent crude climbed back above $110 after Iran dismissed talk of a quick deal with Washington.
Wednesday's data put energy back at the centre of the currency market. Britain's consumer prices rose 3.5% in the year to September, up from 3.1% a month earlier and above the 3.4% that economists expected. Underlying measures also picked up, and separate figures showed government borrowing running ahead of forecasts a week before Chancellor John Healey's first Budget. Sterling barely moved on the numbers because a November hike was already close to fully priced, but the pound kept edging higher against the euro. Oil reversed most of Tuesday's slide, the dollar held near a three week low, the Australian dollar rose to a three week high and gold slipped toward its lowest level in a week.
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Fuel pushes inflation to 3.5%
The Office for National Statistics said the consumer prices index rose 0.4% in September alone, compared with almost no change a year earlier, taking the annual rate to its highest level since last October. Transport, and motor fuels in particular, made the biggest upward contribution. The average price of petrol jumped 8.2 pence to 169.5 pence a litre, the highest since 2022, while diesel rose 10.7 pence to 192.5 pence. Motor fuel prices overall were 29.8% higher than a year earlier. Restaurants and hotels provided a small offset as hotel price growth slowed.
The details worried economists more than the headline. Services inflation, which the Bank of England watches as a gauge of domestic price pressure, rose to 3.7% from 3.4%, slightly above the 3.6% forecast, and core inflation, which excludes food, energy, alcohol and tobacco, picked up to 2.8% from 2.6%, Reuters reported. Goods inflation reached 3.2%, its highest since 2023. The pipeline looks hot too: factory gate prices rose 4.6% from a year earlier, the biggest increase since 2023, and manufacturers' input costs climbed 8.3%, well above the 7.2% expected in a Reuters poll. The Bank of England had forecast inflation of only 3.0% for September in its July projections.
Food was the one calm corner. Annual food inflation held at 1.3%, the same as August, although the ONS noted that industry groups expect food price rises to arrive later and last longer. Recreation prices rose more quickly, helped by live music and computer game downloads, and air fares fell by less than they did a year earlier.
A November hike looks all but certain
Markets now see a quarter point rise in Bank Rate to 4% at the next meeting early in November as close to a done deal. LSEG data put the odds at about 98%, and most traders are also pricing a second hike at the December meeting, CNBC reported. It would be the Bank's first rate rise in more than three years. Policymaker Megan Greene, who has favoured a hike, said on Tuesday that the risk of energy costs feeding into broader inflation was greater than expected, while Governor Andrew Bailey has said the case grows the longer energy prices stay high.
"Inflation moving closer to 4% makes it harder to simply look through the shock," said Adam Deasy, an economist at PwC UK, in comments reported by Reuters. Scott Gardner of J.P. Morgan Personal Investing told CNBC that the recent rise had undone the progress seen in the spring, and that faster services inflation will raise fears of second round effects beyond energy. Tuesday's labour figures, which showed unemployment falling to 4.7% and regular pay growth picking up to 3.7%, had already strengthened that case. Our guide to CPI and PPI inflation data explains why the core and services numbers often move currencies more than the headline.
Borrowing tops forecasts before the Budget
The second half of Wednesday's release was less comfortable for the government. Public sector borrowing reached £24.5 billion in September, £1.8 billion more than a year earlier, as inflation pushed up debt interest costs, and borrowing so far this financial year is running about £6 billion above the forecasts of the Office for Budget Responsibility, the BBC reported. Total public debt passed £3 trillion for the first time, although debt as a share of the economy fell.
Healey has promised not to raise income tax, National Insurance or VAT and to stick to the government's fiscal rules when he presents the Budget next Wednesday. Capital Economics expects a cautious package with little net impact on the economy. For sterling, that matters: MUFG argued on Tuesday that the pound should stay supported as long as the Budget does not damage confidence in the government's fiscal plans, and the September inflation figure also sets the rise in many welfare benefits next spring, which adds to the spending pressure.
Sterling holds steady and grinds higher on the euro
The pound was flat against both the dollar and the euro straight after the release and gilt yields barely moved, CNBC reported, a sign that the market had already priced in a hot reading. Sterling was little changed near $1.339 early in the New York morning, according to Yahoo Finance data, and against the euro it rose for a fifth straight session, hovering near its strongest level in more than 16 months, Reuters reported. EUR/GBP traded around 0.8385 at the same point, below the 0.84 area that MUFG described as the top of a lower range. Our guide to GBP/USD and the pound covers why sterling crosses react so sharply when the UK rate outlook diverges from its neighbours.
The euro remains the weaker side of that trade. It slipped 0.1% to $1.122 and is down almost 1% this month, as France prepares to deploy troops alongside police before more protests planned for Saturday and its 10 year borrowing costs sit near their highest in 24 years. John Hardy, head of macro strategy at Saxo, told Reuters that France's debt problem is a concern for the euro but not yet a source of panic.
Oil climbs back above $110
Tuesday's hopes of a diplomatic breakthrough faded quickly. Brent crude rose $1.32 to $110.11 a barrel in the early European session, and US crude gained $1.18 to $99.00, Reuters reported. Iranian outlet Nournews said Tehran told Pakistan's army chief there would be no talks with Washington until its demands were met, and Iranian parliament speaker Mohammad Bagher Ghalibaf said Iran would not trust the United States unless its conditions for reopening the Strait of Hormuz were fulfilled, Anadolu Agency reported. Iran's Revolutionary Guards also said a supertanker had struck a sea mine south of the strait.
Supply data added to the pressure. Industry figures from the American Petroleum Institute showed US crude stocks fell by about 4.9 million barrels last week, far more than expected, with gasoline and distillate inventories also lower. Kpler counted at least 18 vessel attacks in two weeks, and LSEG analysts warned that Iran is now targeting tankers well beyond Hormuz, into the Gulf of Oman. PVM analysts said neither of the conflicts behind the market's bullish mood had shown any sign of easing.
Dollar near a three week low, Aussie climbs
The dollar index edged up 0.1% to 101.79 in Asian trading after falling 0.3% on Tuesday to its lowest since early October, Investing.com reported. Safe haven demand linked to the war is being offset by lower Treasury yields as investors hide in bonds during swings in AI related stocks, and the tech earnings season has just begun. Commonwealth Bank of Australia's Carol Kong said those results could have a big bearing on the dollar because so much of the growth story depends on the largest tech companies.
The Australian dollar rose 0.3% to $0.7026, a three week high, after Reserve Bank of Australia Deputy Governor Andrew Hauser said the inflation outlook looked materially worse. The yen held near 158.1 per dollar as Bank of Japan Deputy Governor Ryozo Himino said underlying inflation is close to the 2% target, keeping further rate rises in view ahead of next week's policy meeting. The Canadian dollar was steady near C$1.405 after Tuesday's gains on the Alberta vote, and the New Zealand dollar dipped 0.1% to $0.568 ahead of its inflation data.
Gold slips for a fourth day
Gold fell for a fourth straight session and touched its lowest since last Thursday before steadying. Spot gold was down 0.1% at $4,121.27 an ounce in the London morning, while US gold futures eased to $4,139.50, Reuters reported via MarketScreener. Higher oil revives inflation worries, which keeps the Federal Reserve leaning toward more hikes and makes a metal that pays no interest less attractive. Nearly all economists in a Reuters poll expect the Fed to hold next week and raise rates in December, and Bybit's Han Tan said fed funds futures fully price one more quarter point hike this year. Silver fell 1.3% to about $57.25. Our guide to the dollar index and gold explains why yields and the dollar usually matter more for the metal than headlines.
What to watch
- Wednesday: official US oil inventory data from the Energy Information Administration, which will test the large draw reported by industry figures, and New Zealand's quarterly inflation report later in the evening in London.
- Thursday: US weekly jobless claims and the euro area's early consumer confidence reading, according to the Monex Europe calendar.
- Friday: Japan's national inflation and flash PMIs for the euro area, the UK and the US.
- Saturday: further protests planned across France, a risk for the euro when markets reopen.
- Next week: the UK Budget, the Fed and the Bank of Canada on Wednesday, the ECB on Thursday, plus the Bank of Japan meeting and US PCE inflation data.
Energy links all of it. The same fuel prices that lifted UK inflation are pushing central banks in Britain, Canada and the United States toward tighter policy, so a lasting move in crude in either direction will quickly feed into rate expectations and currencies. Our guide to central bank rate decisions explains how traders position before these meetings.
What this means for signal traders
- Do not expect every hot number to move the pound. When a hike is already priced, a strong release can leave GBP flat. The bigger risk now is a surprise in the other direction, or a Budget that unsettles gilts.
- EUR/GBP is the cleaner expression of the story. UK rate hikes and French political risk both point the same way, but the cross is stretched after five days of pound gains, so pullbacks can be sharp.
- Treat Iran headlines as event risk for oil, CAD and gold. Brent moved about $6 in a few hours on Tuesday on an unconfirmed report and recovered within a day.
- Watch the gold floor. The metal is near the bottom of its recent range, so stops just below obvious levels can be swept quickly. Set the position size from the stop distance, not the other way round.
- Check spreads around releases. Liquidity often thins around inflation data, oil inventories and breaking geopolitical news.
None of this predicts the next move. It describes the conditions any forex or gold signal will face in the days ahead.
Official sources
Official pages for the decisions, data and schedules behind this report.
- Bank of England: Monetary Policy Committee dates, the published dates of upcoming rate decisions.
- Office for Budget Responsibility on GOV.UK, the independent body that publishes the official UK fiscal forecasts.
- US Energy Information Administration: petroleum and other liquids, official US oil inventory, production and price data.
Sources
- Office for National Statistics: Consumer price inflation, UK
- Reuters via Euronext: UK inflation and borrowing climb before Healey's first budget
- CNBC: UK inflation jumps to 3.5%, cementing rate hike expectations
- BBC: Inflation and government borrowing highest for a year ahead of next week's Budget
- Reuters via Euronext: Dollar drifts as Middle East tensions simmer, oil rises
- Investing.com: Dollar holds near three week low
- Reuters via Euronext: Brent near five month high on Middle East supply fears
- Anadolu Agency: Oil rises as Iran tensions, US crude stock draw fuel supply concerns
- Reuters via MarketScreener: Gold extends losses to near one week low
- Monex Europe: Week Ahead (PDF)
- Data for the charts: Office for National Statistics (CPI 12 month rate, Table 1); Yahoo Finance (BZ=F daily closes, EURGBP=X).
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