Inflation is the rate at which prices rise across the economy over time. In the UK, it is measured by the Consumer Price Index (CPI) — the ONS’s monthly survey of around 700 goods and services — and the Bank of England has a government-set target to keep CPI at 2%.
Key facts: UK inflation target: 2% CPI | Measured monthly by ONS | Bank of England raises rates when inflation exceeds target | RPI is typically 0.5–1.5% higher than CPI | UK inflation peaked at 11.1% in October 2022 — the highest in 41 years
What Is Inflation in Plain English?
Inflation measures how much prices are rising across the economy as a whole. A 5% inflation rate means:
- A bag of shopping that cost £100 last year costs £105 now
- A heating bill that cost £120/month last year costs £126 now
- A new car that cost £20,000 last year costs £21,000 now
In aggregate, your money buys less — its purchasing power has declined.
How Is Inflation Measured in the UK?
The ONS surveys prices of approximately 700 items every month, from food and fuel to childcare and clothing. These are weighted by how much of a typical household budget they represent:
| Category | Approximate weight in CPI basket |
|---|---|
| Housing, water, electricity, gas | 30% |
| Transport | 16% |
| Food and non-alcoholic drinks | 13% |
| Recreation and culture | 12% |
| Restaurants and hotels | 11% |
| Miscellaneous goods and services | 8% |
| Clothing and footwear | 4% |
| Other | 6% |
If energy prices rise sharply, the 30% weight of housing/utilities means overall CPI moves significantly — exactly what happened in 2021–2023 when gas prices spiked.
CPI, RPI, and CPIH — What’s the Difference?
| Measure | What’s included | Current use |
|---|---|---|
| CPI | Goods and services; excludes housing costs | Government inflation target (2%); BoE target |
| RPI | CPI + mortgage interest; older formula | Student loan interest, rail fare rises, index-linked gilts |
| CPIH | CPI + owner-occupiers’ housing costs (as rental equivalent) | ONS preferred comprehensive measure |
RPI typically reads higher than CPI (usually 0.5–1.5% higher) due to the formula difference and inclusion of housing. This matters for things linked to RPI — student loan borrowers typically pay more interest than if their loans tracked CPI.
What Is the UK’s Inflation Target?
The Bank of England has a 2% CPI inflation target set by the government. When inflation deviates significantly from 2%, the Governor must write an open letter to the Chancellor explaining why and what the Bank is doing about it.
Above target: Bank raises interest rates to slow spending Below target: Bank may cut rates to stimulate spending
When Does the ONS Publish UK Inflation Data?
The ONS publishes the monthly CPI (and CPIH and RPI) figures approximately 2–3 weeks after the reference month ends. Publication dates are announced in advance on the ONS website. The release comes at 7:00am and is closely watched by financial markets, the Bank of England, and the media.
What to watch when inflation is published:
- Headline CPI — the year-on-year percentage change in the full basket
- Core CPI — excludes food and energy (more volatile components), giving a cleaner read on underlying inflation
- Services inflation — the Bank of England pays particular attention to services inflation as an indicator of domestically-generated price pressure
- Food and energy components — often the biggest drivers of month-to-month changes
The ONS Inflation Calculator on the ONS website allows you to see how prices have changed between any two dates since 1988.
What Happens When UK Inflation Misses the 2% Target?
The Bank of England’s inflation target is set by the government. When CPI inflation deviates by more than 1 percentage point from the 2% target — above 3% or below 1% — the Bank Governor must write an open letter to the Chancellor of the Exchequer explaining:
- Why inflation has deviated from target
- What the MPC is doing to return it to target
- How long the deviation is expected to last
During 2022–2023, the Governor wrote multiple such letters as inflation surged to 11.1%. These letters are published on the Bank of England website and provide a useful narrative of the MPC’s thinking during high-inflation periods.
Missing the target does not trigger automatic policy action — the MPC must weigh inflation against growth, employment, and financial stability. But sustained deviation generates political pressure and damages the credibility of the inflation-targeting framework.
How Does UK Inflation Compare to Other Countries?
During the 2021–2023 inflation surge, the UK experienced higher and more persistent inflation than some peer economies:
| Country | Peak CPI inflation | When |
|---|---|---|
| UK | 11.1% | October 2022 |
| Eurozone | 10.6% | October 2022 |
| USA | 9.1% | June 2022 |
| Germany | 10.4% | October 2022 |
| Australia | 8.4% | December 2022 |
UK inflation remained elevated longer than the US partly due to domestic labour market tightness and the UK’s particular energy exposure. The UK imports more LNG (liquefied natural gas) than the US, making it more vulnerable to European gas price spikes following the Ukraine war.
What Is the History of UK Inflation?
A brief history of UK CPI inflation highlights why today’s environment is unusual:
| Period | Average CPI | Context |
|---|---|---|
| 1970s | 12–25% | Oil shock, wage-price spiral |
| 1980s | 5–10% | Thatcher disinflation; fell from 18% in 1980 |
| 1990s | 2–6% | ERM crisis; then stable post-independence |
| 2000–2008 | 1.5–3% | Great Moderation; stable period |
| 2009–2020 | 0.5–3% | Post-crisis low inflation; near-zero rates |
| 2021–2023 | 3–11.1% | Post-pandemic and energy price shock |
| 2024–2026 | ~2–3% | Returning toward target |
The Bank of England’s independence from government (granted in 1997) was specifically designed to insulate monetary policy from political pressures and maintain credibility on inflation. The 2021–2023 episode was the first serious test of this framework in a generation.
What Should I Do When UK Inflation Is High?
High inflation periods require active financial management — the real purchasing power of cash erodes month by month. Practical steps:
Protect your savings:
- Ensure savings rates are above or close to inflation — switch providers if your easy-access rate is significantly below CPI
- Consider index-linked savings certificates from NS&I if available — these are specifically designed to beat inflation
- Review fixed savings bonds: in high-inflation periods, fixing for too long risks locking in below-inflation rates if the Bank of England raises rates further
Adjust your budget:
- Track spending in categories most affected by inflation — food, fuel, energy — these often rise faster than the headline CPI figure
- Renegotiate contracts up for renewal (broadband, mobile, insurance) rather than accepting automatic inflation-linked increases
- Review standing orders and direct debits for services you no longer use — inflation makes cutting waste more urgent
Protect your income:
- Request a cost-of-living pay review if your salary has not kept pace with CPI for two or more years
- If you are self-employed, review your pricing — absorbing inflation costs without passing any on gradually erodes your margins
- State benefits uprating (each April) is based on the previous September’s CPI — check your expected UC or pension increase against current prices
Debt strategy:
- In high-inflation periods, fixed-rate debt (a fixed mortgage, a personal loan at a set rate) is partially eroded in real terms — the nominal debt figure stays the same while prices rise around it. Variable debt, however, typically becomes more expensive as rates rise alongside inflation. For how inflation affects your day-to-day finances, see How Inflation Affects Your Money UK.