UK Inflation Jumps to 3.5% Ahead of the Budget

Week of 26 October 2026

UK inflation hit its highest level in almost a year in September, all but locking in a Bank of England hike on 5 November. Banks dragged the FTSE 100 lower on Budget tax fears, the AI sell-off returned on Thursday and Brent crude topped $116 a barrel on Friday.

Chancellor John Healey delivers his first Budget on Wednesday, the same day as the Fed decision, with the ECB and Bank of Japan to follow. Microsoft, Alphabet and Amazon test the AI trade, while HSBC, Lloyds, NatWest, Shell and BP report in the UK.

Week in Review

UK inflation jumped to 3.5%.

CPI rose to 3.5% in September from 3.1%, above the 3.4% forecast and the highest since October 2025, as motor fuel prices climbed 29.8% on the year. Core inflation rose to 2.8% and services inflation to 3.7%, both ahead of expectations.

The rest of the UK data backed a hike.

Unemployment fell to 4.7% from 4.9% and regular pay growth picked up to 3.7%, while the flash composite PMI rose to an eight-month high of 53.1. Consumers were the weak spot, with retail sales down 0.4% in September and GfK consumer confidence suffering its sharpest monthly fall since April 2020. GBP/USD rose to around 1.34 and EUR/GBP hit a 17-month low near 0.836.

MPC hawk Megan Greene pushed for action.

Greene, one of three members who voted for a hike in September, warned on Tuesday that the energy shock poses a bigger inflation risk than the Bank expected. "It is not obvious to me from this data that our monetary policy stance is meaningfully restrictive," she said. Markets put the chance of a hike to 4% on 5 November at more than 90%.

Banks dragged the FTSE 100 lower.

The FTSE 100 fell almost 2% on the week to around 10,640. Barclays dropped around 7% after missing profit forecasts and announcing around 5,000 job cuts, and HSBC and NatWest fell around 6% on reports that Healey will raise the bank surcharge. Antofagasta and Fresnillo fell around 13% as copper and gold slid. LSEG jumped 7% on Thursday after raising guidance and agreeing to buy Octus, Rentokil rose around 8% on a stronger update and buyback, and BP and Shell gained as oil climbed.

The AI sell-off returned.

The Nasdaq 100 headed for a weekly loss of almost 3% after Thursday's sharp sell-off. Meta fell 7% despite beating forecasts, after lifting its 2026 spending plans to as much as $145 billion and posting its first cash outflow in more than a decade. Chipmakers took the biggest hit, with Lam Research down almost 12% on Thursday, and CoreWeave lost another 10%. IBM chief executive Arvind Krishna said customers "are also getting worried if some of the AI spending is completely out of control with no real return."

Treasuries rallied.

The US 10-year Treasury yield posted its biggest one-day drop since the 2023 SVB collapse on Thursday, slipping below 5% as investors sought safety. Traders expect the Fed to hold next week and put the chance of a December hike at around 80%.

Oil topped $116.

Brent crude rose almost 10% on the week to above $116 a barrel, its highest in around six months, while WTI climbed back above $100. Houthi attacks on Saudi Arabia forced Aramco to evacuate its Dhahran headquarters, and Iran threatened to hit oil facilities across as many as seven Gulf countries if attacked again.

Gold fell below $4,000.

Gold dipped below $4,000 an ounce on Friday for the first time since July, heading for a weekly loss of around 4% as higher oil prices fuelled bets on further Fed tightening.

Biggest Market Movers

• UK100 – fell almost 2%

• UKOIL – rose almost 10% to above $116

• XAUUSD – dipped below $4,000

• EURGBP – hit a 17-month low

• NDQ100 – headed for a weekly loss of almost 3%

• Meta (META) – fell 7% on Thursday

• Lam Research (LRCX) – slid almost 12% on Thursday

• Barclays (BARC) – fell around 7% on the week

• Antofagasta (ANTO) – fell 13% on the week

• LSEG (LSEG) – jumped 7% on Thursday

Top Events in the Week Ahead

Healey's Budget and the Fed decision land on the same day, while Microsoft, Alphabet and Amazon report as doubts over AI spending grow.

The UK Budget

Healey's first Budget comes with inflation at 3.5% and a rate hike days away.

He wants to ease household energy costs without unsettling the gilt market, with fiscal headroom expected to shrink to around £15 billion. Banks look set to bear the brunt, with reports suggesting the bank surcharge could rise from 3% to 8%, while a delay to the planned fuel duty rise is possible.

Fed, ECB and Bank of Japan

All three are expected to hold after hiking in September.

The Fed decides on Wednesday, with markets expecting a December hike instead. Chair Kevin Warsh has moved away from forward guidance, so any hint on timing, or a dissent in favour of a hike, would shift expectations. The ECB meets on Thursday and the Bank of Japan on Friday.

Microsoft, Alphabet and Amazon

Big Tech earnings arrive just as worries over AI spending flare up again.

Microsoft and Alphabet report on Wednesday, followed by Amazon on Thursday. After Meta's sell-off, investors want cloud growth that justifies record capital spending.

Other Events and Earnings

Elsewhere, China's Fifth Plenum starts on Monday and Israel holds a general election on Tuesday. Canada and New Zealand set rates on Wednesday, US GDP and core PCE inflation follow on Thursday, and eurozone GDP is out on Friday.

On earnings, HSBC reports on Tuesday, Standard Chartered on Wednesday, Lloyds and Shell on Thursday, and BP and NatWest on Friday, with the bank surcharge likely to dominate the banks' results. In the US, UPS, Coca-Cola and Visa report on Tuesday, Eli Lilly, Caterpillar and Intel on Thursday, and Exxon Mobil and Chevron on Friday.