UK inflation failed to slow as forecast in September as rising oil prices offset downward pressures from food costs.

The Consumer Prices Index rose 6.7% from a year earlier, the same pace as the previous month, the Office for National Statistics said Wednesday. Economists had been expecting inflation to fall back to 6.6%.

The miss firms up the case for the Bank of England to leave interest rates at their highest level in 15 years. Traders are betting the policy makers will leave the key rate unchanged next month, but that there’s a strong chance of one more hike early next year to ensure inflation falls back to the 2% target.

“Inflation remains sticky,” said Roberto Cobo Garcia, head of G-10 FX strategy at Banco Bilbao Vizcaya Argentaria SA in Madrid. “The slowdown in prices growth is far from what was forecasted at the start to the year.”

Money-market wagers on further rate hikes held broadly steady, placing a 30% chance on a quarter-point increase next month and more than a 60% probability of such a move by early next year. Markets price 40 basis points of policy easing next year, with the first cut by November.

What Bloomberg Economics Says ...

“The Bank of England is unlikely to panic at the news that the rate of inflation failed to ease in September. The bigger picture is that annual price growth is still running below its August forecast and is set for a big drop next month. Add in signs that the central bank appears to have more tolerance for upside data surprises, and we think it will still be minded to keep rates on hold at its November meeting.”

—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT.

The Trades Union Congress noted that the UK still had the highest rate of inflation in the Group of Seven countries.

“While other countries have acted decisively to reduce cost of living pressures, working families and businesses here remain seriously under the cosh,” said TUC General Secretary Paul Nowak. “The UK is teetering on the brink of recession, with employment falling as companies scramble to cut costs.”

Economists expect another step downwards in the inflation rate in October due to a fall in household energy bills under the price cap, which may help keep in reach Prime Minister Rishi Sunak’s goal of halving inflation this year.

“As we have seen across other G-7 countries, inflation rarely falls in a straight line, but if we stick to our plan then we still expect it to keep falling this year,” Chancellor of the Exchequer Jeremy Hunt said. “Today’s news just shows this is even more important so we can ease the pressure on families and businesses.”

The figures also mean welfare recipients are in line for a generous increase in the payments next April, as the annual uprating is based on CPI inflation in the previous September.

The surprise reading on inflation comes just a day after jobs data from the ONS indicated a slight cooling in the labor market. Average earnings growth slowed from a month earlier, though remained near historic highs, while the number of workers on company payrolls dropped.

“Inflationary momentum is set to weaken in the coming months,” said Yael Selfin, chief economist at KPMG UK. “Together with the ongoing loosening of the labor market, this should be sufficient for the Bank of England to keep interest rates on hold.”

Core inflation — which excludes volatile food and energy prices — fell less than expected to 6.1% from 6.2%. Services inflation, which is closely watched by the BOE, unexpectedly accelerated to 6.9% from 6.8%.

Higher prices at the pump for motorists was the biggest driver keeping inflation steady, while prices of food and non-alcoholic drinks and furniture and household goods pulled the other way. The price of motor fuel rose 3.6% between August and September, compared with a drop of 4% a year earlier.

The annual inflation rate for restaurants and hotels also crept up from 8.3% to 8.6%. This sign of domestically driven inflation will be a worry for the BOE, as some policymakers fear workers are still bidding up wages to an extent that is inconsistent with getting inflation down.

“Food and non-alcoholic drinks prices eased again across a range of items with the cost of household appliances and airfares also falling this month,” said ONS Chief Economist Grant Fitzner. “These were offset by rising prices for motor fuels and the cost of hotel stays.”

Paul Dales, chief UK economist at Capital Economics, said it was “disappointing” that CPI failed to fall in September. “But as it is still below the 6.9% rate the Bank of England projected back in August we still think that the Bank won’t raise interest rates again,” he said.

At the Monetary Policy Committee’s last meeting in September, officials voted against a rate hike for the first time since November 2021, with the majority of members preferring to wait and see how the economy evolved.

At one end of the nine-member MPC, Catherine Mann is adamant that monetary policy should remain “aggressive” to avoid the risk that domestic inflationary pressures become embedded. At the other, Swati Dhingra is more concerned that “overtightening” will damage the UK’s supply potential.

The BOE’s Chief Economist Huw Pill is between the two — while he warned against “complacence” in getting inflation down, he said official wage data which have consistently “surprised to the upside” were increasingly looking like an “outlier” when compared to other economic data.

All eyes will now be on the second batch of labor market data from the ONS due Tuesday, covering the UK’s employment, unemployment and inactivity rate.

Producer input and output prices both rose 0.4% on the month reflecting the rising cost of crude oil. They are both lower than a year earlier, however, suggesting pipeline pressures are easing.

“With the all-important Christmas period fast approaching, retailers hope that cost pressures continue to ease in the coming months,” said Helen Dickinson, CEO of the British Retail Consortium. “Unfortunately, the September CPI figures – which will determine how much business rates will increase in April 2024 — mean that retailers face a £470m-a-year increase from next year. This will inevitably put renewed pressure on consumer prices.”

Read more: UK Stagnation Fears Persist Despite Late Summer Economic Rebound

--With assistance from James Hirai, Irina Anghel and Naomi Tajitsu.

(Updates with comment.)