UK inflation holds at 3.8% for third straight month, easing pressure for rate cuts

UK inflation stayed at 3.8% in the year to September, unchanged for a third consecutive month and still nearly double the Bank of England’s 2% target, according to the Office for National Statistics.

Petrol prices and airfares were the biggest upward drivers, offset by the first monthly fall in food and non-alcoholic drink prices since May 2024. Food inflation slowed to 4.5% year-on-year from 5.1% in August, with prices dipping 0.2% on the month. Core inflation, which strips out food and energy, edged down to 3.5% from 3.6%.

September’s CPI reading matters beyond the headline: it is typically used to uprate a wide range of working-age and disability benefits from April, implying a 3.8% increase next year (final decisions rest with ministers). The state pension will rise by 4.8% under the triple lock, which this time is set by earnings rather than inflation.

The steadier picture will bolster expectations that the Bank could resume cutting interest rates in the months ahead. While some forecasters say a November move is possible, most see a clearer path to easing by early 2026 if price pressures continue to cool. Government borrowing costs have already eased in recent weeks, offering the chancellor slightly better Budget arithmetic.

Chancellor Rachel Reeves said she is “not satisfied” with progress and signalled further support may come in November’s Budget. The Conservatives blamed government policies for keeping inflation elevated, while the Liberal Democrats urged action to cut energy and food costs, including support for farmers.

Price trends remained mixed across categories. Housing and household services were up 7.3% year-on-year and education 7.2%, while alcohol and tobacco rose 5.8% and communications 4.7%. Transport matched the headline rate at 3.8%. Clothing and footwear (0.5%) and furniture and household goods (0.4%) saw the smallest increases.

Despite the improvement, UK inflation remains higher than many peers—Germany (2.1%), the EU average (2.4%) and the US (2.9%)—and the IMF expects it to be among the G7’s highest this year and next. Economists broadly expect UK inflation to drift closer to target through 2026, provided energy and services costs continue to ease.

Industry Comments

Professor Joe Nellis is Economic Adviser at MHA, the accountancy and advisory firm.

Prices in the UK rose by 3.8% in the 12 months to September, leaving inflation at its highest rate since the turn of 2024 and almost double the official 2% target. Beneath the surface, price pressures remain stubborn, keeping the spotlight firmly on the Bank of England and the Chancellor’s Autumn Budget.

For the Government, September’s figures have not improved the fiscal arithmetic — while gilts sit at one of their lowest levels this year, persistent high inflation will continue to unsettle the financial markets and keep the cost of servicing the national debt high. Although the IMF’s latest World Economic Outlook reports that UK’s inflationary pressures are largely “temporary,” with the labour market expected to loosen and wage growth to slow, the current trajectory of inflation is unlikely to calm the markets.

With the Budget just over a month away, the Chancellor faces a classic economic trade-off question — how can she stimulate growth without reigniting inflation? Given this tough dilemma, it is likely that she will focus on targeted investment incentives and cost-of-living support rather than sweeping tax cuts. Any hint of fiscal overreach could unsettle financial markets and clash with the Bank’s cautious stance.

Small ‘c’ conservatism is likely to win the day when the Monetary Policy Committee next meets in November. Inflation may have reached its peak but remains too high, meaning a hold on interest rates at 4% is almost a certainty. Policymakers will want more evidence that domestic price pressures — particularly from wages — are cooling before signalling any shift toward rate cuts.

Markets are now pencilling in the first possible reduction in spring 2026, though much will depend on the tone of the Budget and the pace of disinflation through the winter months.

Inflation is expected to edge down as we head into 2026, but the battle will not end quickly. September’s figures highlight a fragile balance — a slow growing economy, stretched public sector finances, and policymakers walking a narrow path between prudence and stimulus. 

For both the Treasury and the Bank, the message is simple: hold your nerve and keep your discipline.

Nicholas Hyett, Investment Manager, Wealth Club

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UK inflation holds steady at 3.8% but food costs climb for fifth month in a row

“A surprise inflationary undershoot will spark relief all round. True, prices are still rising at nearly twice the Bank of England’s target, but if things get no worse its unlikley the rate setters on Threadneedle Street will have to start hiking interest rates again  – and, fingers crossed, that leaves enough oxygen for the economy to pick up some momentum.

The roll-over in food inflation will be particularly welcome, and while services inflation is still high (at a whopping 4.9%!) there’s hope that it will subside once we lap the higher minimum wage and national insurance contributions the government imposed on employers at the start of the year. 

It’s possible the UK is escaping the self-imposed inflationary exceptionalism created by higher taxes and a weakend trade position. We just hope the government doesn’t manage to repeat last year’s trick in November by carefully selecting tax increases that could have been designed to return the UK to inflationary purgatory.”