What Is Inflation? A Simple UK Guide

What is inflation, and why does it matter so much to your money? Inflation is the rate at which prices rise over time. When it is high, your money buys less, your savings lose value faster, and interest rates tend to go up. In this guide I explain what inflation is in plain English, how the UK measures it, and how to protect yourself.

What Is Inflation in Simple Terms?

Inflation measures how fast the general level of prices is rising. If inflation is 3%, something that cost £100 a year ago now costs about £103.

A little inflation is normal in a healthy economy. The problem comes when prices rise faster than wages or savings interest, because then your money is quietly losing its buying power.

How the UK Measures Inflation

The Office for National Statistics tracks the prices of hundreds of everyday items, from food and fuel to rent and holidays. It then works out how much the overall cost of that basket has changed.

There are three main measures you will hear about.

Measure	What it is	Where it is used
CPI	Consumer Prices Index, the main official measure	The Bank of England’s 2% target
CPIH	CPI plus the costs of owning a home	The ONS’s lead measure
RPI	An older measure that usually runs higher	Some rail fares and student loan interest

In the 12 months to September 2026, CPI inflation was 3.5%, according to the Office for National Statistics. CPIH was 3.6%.

What Causes Inflation?

Demand Pushing Prices Up

When people and businesses want to buy more than the economy can produce, sellers can raise prices. This often happens when the economy is booming.

Rising Costs

When energy, raw materials or wages get more expensive, businesses pass those costs on. Energy price shocks have been a big driver of UK inflation in recent years.

More Money in the System

If borrowing is very cheap and money is plentiful, it can push up prices across the economy over time.

Why the Bank of England Targets 2%

The government has given the Bank of England a target of keeping CPI inflation at 2%. Too much inflation erodes savings and makes planning hard. Too little, or falling prices, can stall the economy.

The Bank’s main tool is the interest rate. When inflation is too high, it raises rates to cool spending. When inflation is low, it can cut them. My guide to interest rates explains how this feeds through to mortgages and savings.

How Inflation Affects You

• Savings: if your savings rate is below inflation, your money is losing real value. I explain this in inflation vs savings.
• Wages: if your pay rise is smaller than inflation, you are effectively taking a pay cut.
• Borrowing: higher inflation often means higher interest rates on mortgages and loans.
• Debts: on the other hand, inflation slowly shrinks the real value of fixed debts.
• Taxes: with tax thresholds frozen, inflation pushes more people into higher tax bands.

What Is Hyperinflation?

In extreme cases, prices can spiral out of control, rising by huge amounts every month. That is called hyperinflation, and it can wipe out savings completely. It is rare and usually linked to deep economic or political crises. I cover famous examples in hyperinflation explained.

How to Protect Your Money From Inflation

• Keep only what you need in cash: an emergency fund, plus money for short term plans.
• Shop around for savings rates: a top rate can at least narrow the gap with inflation.
• Invest for the long term: shares have historically grown faster than inflation over long periods, though with ups and downs.
• Use tax wrappers: ISAs and pensions stop tax eating into your real returns.
• Review your budget: rising prices are a good prompt to cut costs you no longer value.

For the next step, take a look at Economic Indicators Explained.

Inflation: Common Questions

Who measures inflation in the UK?

The Office for National Statistics publishes the figures every month. CPI is the main measure and the one the Bank of England targets.

Is some inflation a good thing?

A little is seen as healthy. That’s why the target is 2% rather than zero. Low, steady inflation encourages spending and investment.

Why is deflation a problem?

When prices fall, people delay spending in the hope of lower prices later. That can slow the economy and make debts harder to repay.

What Is the Difference Between CPI and RPI?

Both measure how prices change, but they use slightly different formulas and baskets of goods. CPI is the measure the Bank of England targets. RPI usually comes out higher and is still used for some things, such as student loan interest and some pensions.

How Can I See What My Money Was Worth in the Past?

Try our inflation calculator. It shows what any amount from as far back as 1800 is worth in today’s money.

Does Inflation Affect Everyone Equally?

No. Your personal inflation rate depends on what you spend money on. For example, if energy and food prices rise fastest, households that spend more of their income on those feel it most.

The Bottom Line

So, what is inflation? It is the steady rise in prices that makes your money worth a little less each year. The Bank of England aims to keep it at 2%, but it was running at 3.5% in September 2026. The best defence is to keep cash for short term needs, invest the rest for growth, and make sure your savings and pay are keeping up. For more on why prices feel so high, read why everything costs more.

Content on IceburgWealth.com is for general information only and is not financial advice. I am not a regulated financial adviser, and tax rules and figures can change. Always do your own research and consider speaking to a qualified adviser before making any financial decision.

This article is part of our UK Economy Guide, where you will find every related article in one place.

Disclaimer: This article is for general information only and is not financial advice. I'm not a regulated financial adviser. Rules, rates and allowances can change, so check the latest details and speak to a qualified professional before making any decisions.