What Is Inflation?
Inflation is the rate at which the general level of prices for goods and services rises over time, reducing the purchasing power of money. If inflation is 3%, something that costs £100 today would cost £103 a year from now — and your £100 would buy slightly less.
In the UK, inflation is measured primarily by two indices:
- CPI (Consumer Prices Index) — the official measure used by the government and the Bank of England. It tracks the price of a representative basket of around 700 goods and services, updated annually by the Office for National Statistics (ONS).
- RPI (Retail Prices Index) — an older measure that includes housing costs such as mortgage interest payments. RPI is still used in some contexts (student loan interest, rail fare rises, some pension calculations) but is no longer classified as a National Statistic.
The Bank of England targets CPI inflation of 2% per year, using changes to the base interest rate as its primary tool.
How the Calculator Works
Enter an amount and select a start year and end year to see how inflation has changed the value of money over that period. You can also project forward to estimate what today’s money may be worth in the future, based on an assumed inflation rate.
The calculator uses official ONS CPI data for historical calculations. For future projections, you can set a custom inflation rate or use the Bank of England’s 2% target as a default.
UK Inflation History — Recent CPI Rates
The table below shows the annual average CPI inflation rate for the UK in recent years, as published by the ONS:
| Year | Average CPI Inflation |
|---|---|
| 2019 | 1.8% |
| 2020 | 0.9% |
| 2021 | 2.6% |
| 2022 | 9.1% |
| 2023 | 7.3% |
| 2024 | 2.6% |
| 2025 (to date) | 3.0% |
The spike in 2022–2023 was driven by the global energy crisis, supply chain disruptions, and food price inflation following the pandemic and the conflict in Ukraine. UK CPI hit a peak of 11.1% in October 2022 — the highest level in over 40 years.
The Impact of Inflation on Savings
The real return on your savings is the nominal interest rate minus the rate of inflation:
Real Return = Nominal Interest Rate − Inflation Rate
If your savings account pays 4% interest but CPI inflation is 3%, your real return is just 1%. During the 2022–2023 inflation surge, many savers experienced negative real returns — their money was losing purchasing power even while earning interest.
Over long periods, the compounding effect of inflation is substantial. At just 2% inflation, prices double roughly every 36 years. At 5%, they double in about 14 years. This is why holding too much wealth in cash over the long term carries a hidden cost.
For a detailed view of how compounding works in your favour when you invest, see our compound interest calculator.
How Inflation Affects Different Expenses
Inflation does not hit all prices equally. In recent years, UK households have experienced:
- Housing — house prices and rents have consistently risen faster than general inflation, particularly in London and the South East. Between 2015 and 2025, average UK house prices rose by over 40%.
- Food — grocery prices surged by over 19% in the year to March 2023, driven by energy costs, supply chain pressures, and the war in Ukraine.
- Energy — domestic gas and electricity prices roughly doubled between 2021 and 2023, prompting the government to introduce the Energy Price Guarantee.
- Wages — average UK earnings have grown, but have frequently lagged behind CPI during inflationary periods, leading to a squeeze on real living standards. See our cost of living guide for more detail.
Understanding which costs are rising fastest helps you adjust your budget and prioritise where to focus your financial planning.
Protecting Your Money from Inflation
While you cannot avoid inflation entirely, there are practical steps to reduce its impact on your finances:
- Invest for the long term — historically, UK and global equities have delivered returns well above inflation over periods of 10 years or more. A diversified portfolio in a Stocks & Shares ISA shelters those gains from tax.
- Consider property — UK property has been a strong long-term inflation hedge, though it comes with significant costs, illiquidity, and risk. Buy-to-let income and capital growth have generally outpaced CPI.
- Index-linked savings and bonds — NS&I Index-linked Savings Certificates (when available) and index-linked gilts provide returns directly tied to inflation. These are low-risk options that guarantee your purchasing power is maintained.
- Negotiate your salary — if your wages are not keeping pace with inflation, your real income is falling. Use data from the ONS and industry salary surveys to support pay negotiations.
- Reduce cash holdings — keep enough cash for emergencies (three to six months of expenses) but avoid holding large sums in current accounts earning little or no interest. Move surplus cash into higher-rate savings accounts or investments.
- Lock in fixed costs — fixed-rate mortgages, fixed energy tariffs (when available at reasonable rates), and other fixed commitments protect you from rising prices during the fixed period.