UK Inflation Jumps to 3.5%: Markets Expect the Bank of England’s First Rate Hike in More Than Three Years

On October 21, 2026, the UK Office for National Statistics (ONS) reported that consumer price inflation rose to 3.5% year on year in September, up from 3.1% in August. Transport made the largest contribution, led by motor fuels, whose prices were up 29.8% over the year. ONS September bulletin. Economists polled by Reuters had expected 3.4%, and the release strengthened expectations among investors and analysts that the Bank of England will raise Bank Rate from 3.75% to 4% on November 5 — its first hike in more than three years. Reuters via Investing.com.

What the Data Showed

The headline number is only the starting point:

• Headline CPI: 3.5%, the highest since October 2025.
• Core inflation, which excludes energy, food, alcohol and tobacco: 2.8%, up from 2.6%.
• Services inflation: 3.7%, up from 3.4%.
• Goods inflation: 3.2%, the highest since September 2023.

According to the ONS, petrol averaged 169.5 pence per litre in September and diesel 192.5 pence. Factory gate prices rose 4.6% over the year, and manufacturers’ input costs rose 8.3%. These are “pipeline pressures”: business costs that can reach consumer prices later. Reuters via Investing.com.

There is a caveat. ING analysts noted that airfares, which rose 3.9% in September after falling 8% in August, exaggerated the jump in services. In their view, there is still no sign that energy costs are spreading to other prices. Investing.com.

Why Central Banks Watch for Second-Round Effects

A fuel price spike is an external shock: a higher Bank Rate will not make oil cheaper. Central banks are usually willing to look through such a jump, as long as it stays contained.

The risk lies in second-round effects. Hauliers and farmers build pricier diesel into their charges, workers ask for higher wages, and companies raise prices for services. Inflation then becomes broader and more persistent, which is why central banks focus on core and services inflation.

Governor Andrew Bailey has said a hike becomes more likely the longer energy prices stay high. Monetary Policy Committee member Megan Greene, who has favoured a hike, said the risk of broader inflation from the energy shock was greater than expected. In September, the committee held rates by a 6–3 vote, with three members voting for 4%. InvestingLive preview.

How Rate Expectations Reach Markets

When markets price in a rate hike, short-dated government bonds (gilts) react first: their yields rise and prices fall. Fixed-rate mortgages then become more expensive, because lenders price them off market rates. Sterling gains support as assets in pounds offer higher yields, although a more cautious tone from the Bank of England could quickly reverse those expectations.

The budget adds to the backdrop. Public sector borrowing reached £24.5 billion in September, above forecasts, and public debt passed £3 trillion. Investing.com. The Budget will be presented on October 28, and it will shape how much fiscal policy helps or works against the central bank.

The Broader Picture: Central Banks Are Hiking Again

The UK is not alone. In a Reuters poll published October 20, 94 of 100 economists expected the US Federal Reserve to hold its target range at 3.75–4.00% at the October 27–28 meeting, and all 100 forecast a hike in December. Reuters poll via Investing.com. The ECB already responded to the energy shock with a rate hike in June; we explained the logic in our preview of that ECB meeting.

The common thread is expensive energy amid the war with Iran: according to FXStreet, Brent is trading above $108 a barrel. FXStreet.

What It Means for Ukraine

Ukraine imports a large share of its fuel, so higher global energy prices feed into domestic prices too. This is imported inflation: it originates abroad but affects the National Bank of Ukraine’s decisions just as domestic inflation does.

The second channel is the cost of money. When the Fed and the Bank of England raise rates, investors earn more on safe assets, and emerging-market borrowers have to offer more to attract capital. For a Ukrainian investor holding foreign bonds or bond ETFs, rising rates mean lower prices for long-dated bonds, but higher yields on new money.

Practical Takeaway for Investors

Look beyond headline inflation to core and services: they show whether an energy shock is turning into a lasting problem. Check the duration of your bond funds — the longer it is, the more strongly prices react to rate changes. The next markers are the Fed meeting on October 27–28, the UK Budget on October 28 and the Bank of England decision on November 5.