Your guide to inflation

Inflation measures the rate at which the price of goods and services go up by each year. It can rise and fall, based on supply and demand. We can help you understand what inflation is, how it’s measured, and how it affects you and your money.

What is inflation?

Inflation is the increase in the price of goods (like clothes or food) and services (like hairdressing or plumbing) over a period of time.

It’s calculated by taking the cost of something today – such as a pint of milk – and looking at how much it cost this time last year. This comparison is done on a wide variety of items, known as the ‘basket of goods and services’ which the Office for National Statistics then averages.

Inflation is expressed as a percentage, based on the increase in prices of the items in the basket. So, if your pint of milk cost £1 last year, and £1.03 this year, inflation has risen by 3%.

Is high inflation a bad thing?

The UK’s inflation target is 2% year on year. Controlled inflation can be positive for the economy. But if it jumps quickly, or unpredictably, it can make it difficult for people to know how much to spend, save or invest.

This illustration shows how inflation can impact your savings if inflation was at a rate of 3%. The buying power of £10,000 in Year 1 equates to £9,700 in Year 2. The figures have been rounded up to the nearest whole number.

How could inflation impact me?

On a daily basis, inflation changes how much money is worth. If there’s a higher inflation rate, your money won’t go as far because things cost more.

This illustration shows how inflation can impact your savings if inflation was at, for example, 3%.

You can find the latest inflation information at Office for National Statistics. It is also worth remembering that the rate of inflation can rise and fall.

What are the impacts of inflation?

We lose our spending power expandable section

When you buy goods and services, you may get less for your money. If prices go up and increase more than the rise in wages, it can have an impact to the cost of living.

To keep the same spending power, wages would need to increase. Some companies may not want to, or be able to do this. If wages did increase, this could cause more inflation if prices need to rise to cover for the cost of the wage increases.
It affects the cost of borrowing from banks expandable section

As inflation rises, interest rates may rise too. If this happens, it can make it more expensive for you to borrow.
Why is it rising sharply now? expandable section

A rise in inflation can be caused by a wide range of things. It’s most often linked to an increase in demand for products and services or an increase in production costs.

The cost of energy is a key reason why things are getting more expensive. Oil and gas prices increased because energy was in greater demand.

Inflation calculator

How will inflation affect my cash?

It’s difficult to know, but our inflation calculator can give you an idea. By putting in the amount of cash you have, and adding in the current rate of inflation, we can work out the future buying power of your money. This calculation is based on the inflation rate remaining the same over the next year.

Cash amount held:

£

Inflation rate %:

Show my result now

The calculator is an estimate. It does not include interest you could earn over time. The rate of inflation can rise and fall.

For an up-to-date view, visit the Office for National Statistics.

What could I do now?

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