What is inflation in the UK, how is it measured, and what does it mean for your money?

By FastBuySale Newsroom · 5 Nov 2026 · 21m ago

Key UK inflation terms in plain English

Inflation in the UK is the rate at which prices for goods and services rise over time. The Bank of England puts it simply: inflation is when prices rise, and how quickly they do so is called the rate of inflation. If CPI inflation is 2%, a basket that cost £100 a year ago would cost £102 today.

The UK's headline measure is the Consumer Prices Index (CPI), published monthly by the Office for National Statistics (ONS). The Government sets the Bank of England a target of keeping CPI inflation at 2%, and the Bank's main tool for doing that is interest rates. According to the ONS, CPI rose by 3.5% in the 12 months to September 2026, up from 3.1% the month before, so prices are currently rising faster than the target.

Consumer Prices Index (CPI): the measure of inflation the Bank of England targets. Each month the ONS collects around 180,000 prices of about 700 items in a shopping basket designed to represent what people buy on average, from a loaf of bread and a bus ticket to a car and a holiday.

Rate of inflation: the change in CPI compared with a year earlier. If a £1 loaf costs £1.03 a year later, its price has risen by 3%.

CPIH: CPI including owner occupiers' housing costs. The ONS reports CPIH rose by 3.6% in the 12 months to September 2026, up from 3.3% in August.

Core inflation: inflation excluding energy, food, alcohol and tobacco, which can be volatile. Core CPI rose by 2.8% in the 12 months to September 2026, up from 2.6% in August, per the ONS.

Goods and services inflation: the ONS splits the figures. In September 2026 the CPI goods annual rate rose from 2.7% to 3.2%, and the services rate from 3.4% to 3.7%.

Deflation: when overall prices fall. The Bank of England warns this can lead businesses to cut wages and staff, causing lower incomes and higher unemployment, which is why a little inflation is seen as helpful.

Bank Rate: the Bank of England's base rate, which it describes as the most important interest rate in the UK because it influences all other interest rates. The Bank's site listed Bank Rate at 3.75% when checked, with the next decision due on 5 November 2026; check the Bank's site for the latest figure.

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The 2% target and the rules around it

The Government sets the Bank of England an inflation target of 2%. The Bank says this target is similar to that of many other countries: low enough to keep price rises small but high enough to avoid deflation.

If inflation misses the target by more than 1 percentage point either side, so CPI is above 3% or below 1%, the Governor must write a letter to the Chancellor explaining why and setting out what the Bank will do to bring it back to 2%. The Bank publishes these letters; recent ones are dated April 2026, December 2025, September 2025 and June 2025.

Why the target matters: the Bank says high and unstable inflation makes it hard to plan how much to spend, save or invest, and hard for businesses to set prices. In extreme cases, high and volatile inflation can cause an economy to collapse, as in Zimbabwe in 2007-2009.

Track record: between 1997 and 2021, CPI inflation averaged 2%, in line with the target. It began to rise in 2021, peaked at 11% in 2022 and has fallen since then, according to the Bank of England.

What moved prices recently: the ONS says transport, particularly motor fuels, made the largest upward contribution to the monthly change in September 2026, while restaurants and hotels made the largest partly offsetting downward contribution. Motor fuel is a big part of many budgets; estimate journeys with the

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How interest rates are used to control inflation

The Bank of England's main tool is interest rates. Higher rates make borrowing more expensive and encourage saving, so people tend to spend less, and prices tend to rise more slowly. Lower rates make borrowing cheaper and reduce the incentive to save, which encourages spending and can push inflation up.

For borrowers, the interest rate is what you are charged for borrowing, shown as a percentage of the loan. For savers, it is what is paid into your account as a percentage of your savings.

The Bank can also buy and sell bonds, mainly government bonds known as gilts, to support spending. Buying assets this way is called quantitative easing (QE). The Bank says it used QE when interest rates were very low, almost at zero.

Example: on a mortgage, a change in Bank Rate can feed through to the rate you pay, depending on your deal. Model how a rate change affects monthly payments with the

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What UK inflation means for your money

Savings: if your savings rate is below inflation, your money loses buying power in real terms. Illustration: £10,000 earning 2% while prices rise 3.5% buys roughly 1.5% less after a year. Compare growth with the and check real values with the

Pay: a pay rise below CPI is a real-terms cut. Use the to see your take-home pay and compare it with price rises.

Percentages in practice: the Bank of England notes that a 2% rise on a £10 item adds 20p, but on a £1,000 item adds £20. The bigger the purchase, the bigger the cash increase.

Cost of living: the Bank explains that when prices rise quickly, you cannot buy as much with your money, so the cost of living is higher.

Tax-free savings options can help protect returns from tax: see and For retirement income and inflation, see

When the next figures land: the ONS release for September 2026 was published on 21 October 2026, with the next release due on 18 November 2026.

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