What inflation is, how CPI and RPI are measured in the UK, the Bank of England's 2% target, worked examples of how inflation affects savings, debt, pay and pensions, and practical ways to protect yourself.
Inflation is the rate at which prices rise over time. When inflation is 3%, something costing £100 a year ago costs about £103 today. Even modest inflation steadily reduces what your money can buy, which matters for savings, pay rises, pensions and debt.
How inflation is measured in the UK?
- CPI (Consumer Prices Index): the main measure, published monthly by the Office for National Statistics (ONS). It tracks the prices of a "basket" of goods and services households typically buy.
- CPIH: CPI plus owner-occupiers' housing costs. The ONS's lead measure.
- RPI (Retail Prices Index): an older measure, usually higher than CPI. It's no longer a national statistic, but is still used for some things, including student loan interest, some rail fares and index-linked gilts.
Your personal inflation rate depends on what you spend money on. The ONS has a personal inflation calculator.
The Bank of England's role
The government sets the Bank of England a target of keeping CPI inflation at 2%. The Bank's main tool is Bank Rate: raising it tends to reduce borrowing and spending, bringing inflation down; cutting it does the opposite. Changes affect mortgages, loans and savings rates.
What inflation means for your savings?
If savings earn less than inflation, their real value falls. For example, £10,000 earning 2% when inflation is 4% grows to £10,200, but buys only what about £9,800 would have bought a year earlier.
Over ten years at 3% inflation, £10,000 kept in cash with no interest would buy only about what £7,400 buys today.
What inflation means for debt?
Inflation reduces the real value of fixed debts. A fixed mortgage payment becomes easier to afford if wages rise with inflation. But higher inflation often leads to higher interest rates, which raises the cost of variable-rate and new borrowing.
Pay and benefits
- Pay: if your pay rises by less than inflation, it's a real-terms pay cut.
- Benefits: most working-age benefits are usually uprated in April in line with the previous September's CPI.
- State Pension: rises under the "triple lock" by the highest of earnings growth, CPI inflation or 2.5%.
Pensions and investments
Over long periods, investments such as shares have historically grown faster than inflation, though with ups and downs and no guarantees. Some pensions and annuities increase with inflation; others are fixed. When planning retirement, think in today's money.
Practical ways to protect yourself
- Keep an emergency fund in cash, in the best-paying easy-access account you can find.
- Shop around for savings rates; rates vary widely.
- Use your ISA allowance, so interest isn't reduced by tax.
- Invest for long-term goals (five years or more), accepting that values can fall.
- Consider fixing costs such as mortgages or energy tariffs, when it suits your circumstances.
- Review your budget regularly as prices change.
- Ask for a pay rise, with evidence of your value and pay in your sector.
Inflation in financial calculators
Good calculators let you include an inflation assumption. A pension projection in "real terms" shows what your future money would be worth today. Without that, large future figures can look more generous than they are.
Deflation
Deflation, or falling prices, sounds good but can be harmful: people delay spending, which can slow the economy. The Bank's target aims to avoid both high inflation and deflation.
Frequently asked questions
Why do prices still rise when inflation falls?
Falling inflation means prices are rising more slowly, not falling.
Where can I find the latest figure?
The ONS publishes inflation figures each month.
Sources and further reading
Facts checked on 20 October 2026. Spotted an error? Tell us and we will correct it.