What is inflation?
The nutshell
Inflation means prices going up over time. When prices rise, the same amount of money buys less than before, because things like food and bus fares cost more.
Every fact on this page comes from official statistics bodies and non-partisan explainers. Each source tag — like BoE — opens where a fact comes from.
The basics
What inflation means
Inflation is how much prices go up over time. If inflation is 3%, then on average things cost about 3% more than a year before.BoE So a bag of shopping that cost £100 last year might cost about £103 now. When there is inflation, the same money buys a bit less than before.
How inflation is measured
The Office for National Statistics, the UK's official number-counter, works out inflation each month.ONS It tracks the cost of a basket of everyday goods and services — food, clothes, bus fares, and lots more. Comparing the price of that basket now with its price a year ago gives the rate of inflation. The main measure is called the Consumer Prices Index, or CPI.
Why 2% is the target
The government sets the Bank of England a target of keeping inflation at 2%.BoE A small, steady rise in prices is seen as normal. If prices fall instead, that is called deflation, and the Bank of England says deflation can be bad for jobs and wages. To slow inflation down, the Bank of England can raise interest rates, which makes borrowing money cost more.
When inflation was high
Inflation is usually low, but it can jump. The House of Commons Library records that UK inflation rose from under 1% in early 2021 to 11.1% in October 2022 — a 41-year high — before slowly easing.HoC Even when inflation drops, prices do not go back down. Falling inflation just means prices are rising more slowly than before.
- A small, steady rise in prices is seen as normal. The government sets the Bank of England a target of 2% inflation.
- Inflation is an average across many prices. Some things rise faster than others, and a few prices can even fall.
- The Office for National Statistics works out inflation each month by tracking the cost of a basket of everyday goods and services.
- Falling inflation does not mean falling prices. It means prices are still rising, just more slowly than before.
- Inflation is not the same as the cost of living. Inflation is the rate at which prices change, not the total amount everything costs.
- High inflation and high prices are not the same thing. Prices can stay high even after inflation drops back down.
The deep end6 min
How the rate is worked out
Inflation is worked out by comparing prices now with prices a year earlier. The Office for National Statistics tracks the cost of a basket of everyday goods and services — food, clothes, transport, and much more — and measures how much that total cost has changed over twelve months.ONS The main figure from this work is the Consumer Prices Index, or CPI. CPI is the measure the government uses when it sets the Bank of England its 2% target.BoE
The 2% target, and who sets it
The 2% target is not chosen by the Bank of England. The government sets the target, and the Bank of England is asked to meet it.BoE A small, steady rise in prices lets people and businesses plan ahead. The opposite of inflation is deflation — prices falling across the board. The Bank of England says deflation can be bad for the economy, because businesses earn less and may cut wages and jobs.BoE
How the Bank tries to steer inflation
The main tool the Bank of England has is the interest rate — the cost of borrowing money.BoE Raising interest rates tends to make people spend less. When spending slows, businesses are less able to keep raising prices, so inflation eases. Lowering interest rates works the other way. The Bank of England changes the rate to try to keep inflation close to 2%.
When inflation was high
Inflation is usually low, but it can rise sharply. UK inflation was under 1% in early 2021. It then climbed almost without a break to 11.1% in October 2022, the highest rate in 41 years, before easing over the next two years, according to the House of Commons Library.HoC The Library also records that core inflation — a measure that leaves out food and energy, whose prices swing about a lot — peaked later, at 7.1% in May 2023. Even as inflation fell back, prices did not drop. Lower inflation means prices rise more slowly, not that prices fall.