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CPI inflation jumped to its highest rate since January 2024 in September, driven by another surge in fuel and heating oil prices as constrained refining capacity and tensions in the Middle East continue to push up energy costs. Looking ahead, we expect inflation to rise further over the coming months as utility-price inflation accelerates and higher energy costs work their way through supply chains. Even with measures in the Budget designed to ease price pressures, inflation is likely to peak at around 4.5% in February.
Rebounding fuel prices drive up inflation
Inflation rose from 3.7% to 4.1% in September. Motor-fuel inflation accelerated from 11.7% to 17.7%, while heating oil inflation surged from 44.6% to 58.6%. Together, the two components accounted for around three-quarters of the increase in headline inflation.
Elsewhere, package holiday inflation jumped from -0.4% to 2.3% and rental inflation also rose from 5.5% to 6.3%, which lifted services inflation to the highest since August 2024.
Food inflation remained subdued rising from 0.1% to 0.4%, but we think food prices will gain momentum in the coming months as higher wholesale agricultural prices, due to higher energy prices and El Nino damaging crop yields, work their way through to supermarket shelves.
Food inflation remained subdued, edging up from 0.1% to 0.4% but, we think food prices will gain momentum over the coming months as higher energy costs and El Niño-related crop damage raise wholesale agricultural prices and eventually feed through to supermarket shelves. Indeed, the UN food price index already shows that agricultural prices are up 5.75% y/y.
All told, heating oil and motor fuels continue to be the key driver of inflation this year, accounting for 1.3ppts of the 1.4ppts jump in headline inflation from 2.7% to 4.1% since February.
Budget will help weigh on inflation, but won’t offset sharp rise in utility bills
In the immediate term, October will be the key month for gas and electricity inflation as most providers tend to hike tariffs in October. While a jump in bills is certain, a bigger or smaller rise in utility prices than we expect could materially shift the inflation outlook for 2027. In any case, we pencil in a sharp rise in energy inflation from 15.3% to around 20%, the highest since February 2023.
Turning our attention back to Tuesday’s Budget which included a range of measures intended to reduce energy costs and ease pressure on household finances. We estimate that these measures will lower average CPI inflation by around 0.2 percentage points in 2027. However, the timing of some policies remains unclear, and a substantial increase in tobacco duties will offset much of the impact on inflation
In any case, utility bills are likely to reset higher over the next year, keeping energy inflation elevated throughout 2027. The sustained rise in energy costs also makes a broader increase in inflation increasingly likely as businesses pass higher costs through to food, manufactured goods and energy-intensive services such as air travel.
Ultimately, we expect inflation to peak comfortably above 4% in the new year and remain persistently above target until 2028, when favourable base effects should pull it back towards 2%. The risks are tilted to the upside: inflation could peak higher if energy costs rise further or pass through to consumer prices more quickly than expected. Budget measures, including the extension of fuel-duty cuts, will cushion the impact but are unlikely to change the broader trajectory. With substantial cost pressure already moving through supply chains, inflation is unlikely to return to target before 2028 without a sharp fall in energy prices.
