UK inflation rose higher than expected to 3.5% in September, up from 3.1% in August, fuelled by higher petrol and diesel prices, increasing pressure on household budgets.

The Consumer Prices Index (CPI) recorded its third consecutive monthly increase, reaching its highest level since October 2025 and moving 0.5% above the Bank of England’s (BoE) July forecast.

Core inflation, which excludes energy and food, rose from 2.6% to 2.8%, while services inflation increased from 3.4% to 3.7%. Food inflation remained stable at 1.3%.

Lloyds said the larger-than-expected rise in headline inflation remained predominantly energy-driven, with underlying price pressures showing a more limited increase. However, it warned that higher energy costs could feed through into wider inflation if they persist.

Danni Hewson, head of financial analysis at AJ Bell, said: “It will come as no surprise that the skyrocketing price of filling up a vehicle was the primary driver for the outsized jump in September. Petrol prices ratcheted up to levels motorists haven’t had to endure since 2022 and diesel costs hit a record high.”

Airfares also contributed to the increase, while households face further pressure from higher energy bills and rising business costs. Hewson added that deteriorating consumer confidence could lead people to postpone major purchases and increase their savings where possible.

The figures have strengthened expectations that the BoE could raise interest rates before the end of the year, with markets increasingly pricing in a November increase and the possibility of a second move before January. Higher borrowing costs could put further pressure on mortgage affordability, although the extent of any additional increases will depend on how inflation develops.

Mortgage rates had already risen significantly amid geopolitical uncertainty and the prospect of higher interest rates. The latest inflation figures were largely anticipated by markets, meaning they were unlikely to trigger a substantial immediate shift in fixed-rate mortgage pricing.

However, savers could benefit from higher rates. Andrew Phillips, managing director of V12 Retail Finance, said consumers remained willing to spend but were becoming more selective. The company reported a 7% annual increase in the value of retail finance provided in the third quarter, with home improvement finance more than doubling.

Phillips said: "Households are still prepared to make larger purchases where they see a clear need or long-term value, even as wider cost pressures remain elevated.

With inflation proving more persistent and the prospect of interest rates remaining higher, affordability is likely to become an even more important consideration in the months ahead."

The inflation figures also have implications for pensioners. The full new state pension is expected to rise by 3.9% under the triple lock, reflecting earnings growth rather than inflation, adding around £488 a year from April 2027 to approximately £13,036. Recipients of inflation-linked defined benefit pensions could receive increases of up to 3.5%, depending on scheme rules and applicable caps.

David Brooks, head of policy at Broadstone, said the expected State Pension increase would provide “much-needed breathing space for lower-income pensioners” as cost-of-living pressures intensified, adding that the debate over the long-term sustainability of the triple lock was likely to attract greater scrutiny.

For mortgage borrowers, the outlook remains uncertain ahead of next week’s Budget.

John Phillips, CEO of Just Mortgages and Spicerhaart, said: "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."

Rachel Geddes, strategic lender relationship director at Mortgage Advice Bureau, added: "For anyone with a mortgage, or planning to get one, what really matters is what the Bank of England does with interest rates next."

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