Inflation has been the word on everyone's lips in recent years, and while it has fallen significantly from its 2022 peak of over 11%, it remains something every UK household needs to understand and plan for.
- Why does inflation matter for your money?
- How is inflation measured?
- What is the Bank of England doing about inflation?
In simple terms, inflation means the prices of goods and services are rising. When inflation is at 2.8% — as it currently is in the UK — that means things cost on average 2.8% more than they did a year ago. A £100 shopping basket last year now costs around £102.80.
Why does inflation matter for your money?
The biggest practical impact of inflation is that it silently erodes the value of your savings if the interest rate you are earning is lower than inflation. If your savings account pays 2% but inflation is 2.8%, your money is actually losing purchasing power in real terms — even though the number in your account is going up.
This is why finding savings accounts that beat inflation is so important. With the best easy-access accounts currently paying above 4.7% AER, savers who shop around are comfortably beating inflation right now.
How is inflation measured?
The UK uses two main measures of inflation. CPI — Consumer Prices Index — is the headline measure used by the Bank of England to set interest rates. It tracks the price of a basket of around 700 everyday goods and services.
RPI — Retail Prices Index — is an older measure that includes housing costs like mortgage interest payments. It tends to run slightly higher than CPI and is still used for some index-linked savings products and rail fare increases.
What is the Bank of England doing about inflation?
The Bank of England's main tool for controlling inflation is the base rate. When inflation is too high, the Bank raises rates to make borrowing more expensive and encourage saving, which slows spending and brings prices down. When inflation falls to target, rates come down again.
The Bank's target is to keep CPI inflation at 2%. With inflation at 2.8% in early 2026, rates are still above their long-term average but moving in the right direction.
Bottom line
Inflation affects every aspect of your financial life — from the cost of your weekly shop to the real value of your savings. Understanding it helps you make smarter decisions about where to keep your money and how to protect its value over time.