What inflation is and how it affects your money

Inflation is the rate at which prices rise across the economy, which means the same amount of money buys less over time. The Office for National Statistics (ONS) tracks the prices of a large basket of goods and services that households buy, and the percentage change in that basket over 12 months is the figure reported as "the inflation rate". In the 12 months to August 2026, the Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 3.3%¹.

In plain terms, a 3.3% inflation rate means that prices overall, on average, are 3.3% higher than a year earlier. The word "average" matters: some prices in the basket rose much faster, such as motor fuels at 23.0% over the same 12 months, while food and non-alcoholic drinks rose only 1.3%¹. Your own experience of inflation depends on what you actually spend money on.

Inflation matters to almost every part of your finances. It is the yardstick against which pay rises, savings interest, pension increases and benefit uprating are judged, and the Bank of England is required by the Government to keep it at 2%². This page explains what inflation is, how the official figures are put together, and how to read them against your own costs.

Inflation means your money buys less over time

The simplest definition of inflation is a sustained rise in the general price level, or equivalently a fall in what each pound buys. The Pension Protection Fund defines the Consumer Prices Index as measuring "the average change in the price consumers pay for a basket of goods and services"². Government guidance describes the Retail Prices Index as "a measure of inflation, which measures changes to the cost of living in the UK"⁵. Both are attempts to answer the same question: how much more, or less, does the typical household's spending cost now than it did before?

The consequence for a consumer is erosion of buying power. If prices rise 3.3% over a year and your income does not, you can buy about 3.3% less with the same money by the end of the year. This is why economists talk about "real" values: a real pay rise is one above inflation, and a real return on savings is an interest rate above inflation. Anything below inflation is a loss in buying power, even if the cash figure looks like a gain.

Inflation also works through contracts and rules that are tied to an index. The basic State Pension increases every year by the highest of earnings growth in Great Britain, CPI price growth in the UK, or 2.5%⁶. Student loan interest on Plan 1 loans in England is set as the lower of the RPI at the preceding March, or 1% above the highest base rate of a nominated group of banks⁷. So the choice of index, and its level, changes real outcomes for pensions, loans, rents and wage bargaining. The page on inflation-linked increases covers how these uprating rules work.

The latest figure: CPIH at 3.3% over 12 months

The most recent ONS bulletin, for August 2026, shows CPIH rising by 3.3% over 12 months, up from 3.2% in the year to July 2026¹. The CPI, which is the measure the Government's 2% target is based on, rose 3.1% over the same 12 months, up from 2.9% the previous month⁸. In June 2026 the CPIH rate had been 2.8%, so the rate has been climbing through the summer⁹.

Within the headline figure, categories moved very differently:

The gap between the categories explains why two people can report completely different experiences of the same economy. A household that drives a lot and heats a large home faced price rises far above the 3.3% average, while a household spending mainly on food saw much lower increases. Housing and household services, at 4.3%, was one of the fastest-rising divisions, and it carries a large weight in the index, so it pulled the headline up¹.

On a monthly basis, CPIH rose 0.5% in August 2026, compared with a rise of 0.3% in August 2025¹. The monthly figure shows how prices moved within the month; the 12-month figure compares the price level with a year earlier. Both are published together in the same bulletin.

How the ONS measures prices: a basket of around 700 items

The inflation rate is not measured by surveying every price in the country. The ONS compiles its consumer price indices from a representative sample of approximately 760 goods and services, reviewed each year so the basket keeps up with what households actually buy⁴. Prices are collected from approximately 20,000 outlets within the UK, and local price collectors visit 20,000 shops in around 150 locations to collect over 100,000 prices⁴. In total the sample runs to approximately 180,000 price quotations per month⁴.

The process runs on a monthly cycle. Much of the price collection takes place at a set point in time, usually the second or third Tuesday of each month⁴. Around 160 items are collected centrally rather than by local collectors, and some categories now use large alternative data sources instead of manual collection, including rail fares, second-hand cars and much of the grocery market⁴.

The weights, which decide how much each category matters in the average, come from household spending surveys. The Living Costs and Food Survey is a continuous survey of the expenditure patterns of private households, based on a sample of around 6,000 households per annum⁴. The page on the inflation basket goes into how the basket is chosen and updated.

CPIH, CPI and RPI: what each index includes

The UK has three long-running consumer price indices, and they give different answers because they include different things and are calculated differently.

CPIH is described by the ONS as "the most comprehensive measure of inflation as it includes owner occupiers' housing costs and Council Tax, which are excluded from the CPI"⁴. It became the ONS lead inflation index on 21 March 2017⁴. The CPIH and CPI cover the expenditure of all private households, institutional households and visitors to the UK, while the RPI's coverage is narrower⁴.

The calculation also differs. Stratum indices are calculated using predominantly the geometric mean for the CPIH and CPI, and arithmetic means for the RPI at the elementary aggregate level⁴. This is one reason the RPI tends to run higher: in August 2026 the annual RPI inflation rate was 3.4%, against CPIH at 3.3% and CPI at 3.1%¹.

The RPI has a long history, providing estimates of inflation from 1947 onwards, with the first official release of consumer price inflation produced in January 1956⁴. But the ONS states plainly that the RPI and its subcomponents do not meet the required standard for designation as accredited official statistics¹. It survives because it is written into older contracts, including some pension schemes, index-linked gilts and student loan interest rules⁷. Following a consultation, CPIH methods and data sources will be introduced into the RPI from 2030 at the earliest, and the supplementary and lower-level RPI indices will be discontinued¹. The pages on CPI and CPIH and the RPI cover each measure in detail.

Why housing costs are counted: owner occupiers and Council Tax

Housing is one of the largest costs most households face, and how it is treated is the main difference between the indices. The owner occupiers' housing (OOH) costs component accounts for approximately 18% of the CPIH and is the main difference between CPIH and CPI¹⁰. CPIH measures OOH using an approach called rental equivalence, which estimates the rent a homeowner would pay for their own home, and OOH currently accounts for 16.5% of the expenditure weight of CPIH⁴.

Council Tax is the other addition. It is not included in CPI, but it contributed 0.21 percentage points to the Household Costs Index (HCI) annual rate for all households in June 2026¹¹. The HCIs, a separate set of ONS statistics, go further still: they include changes in mortgage interest rates, stamp duty and other costs related to the purchase of a dwelling, all of which are omitted from CPI¹¹.

The effect of these choices shows up in the group figures. In the year to June 2026, outright owner-occupier households experienced the lowest annual inflation rate of all tenure types, at 2.6%¹¹. The gap between the HCI and CPI annual rates for all households was 0.2 percentage points in June 2026, with owner occupiers' housing costs contributing 0.09 percentage points of that difference¹¹. The comparison page on CPIH versus the Household Costs Index sets out which measure answers which question.

What inflation does to your savings

Inflation is the main risk to money held in cash. NS&I's guidance states it directly:

The same applies to fixed-term products. MoneyHelper warns that with fixed-rate savings bonds, "your original investment won't hold its value in real terms (its 'buying power') if the interest you're getting is less than the rate of inflation over the investment period"¹³. So a savings account paying less than the current inflation rate is losing value in real terms, even though the balance shown on the statement grows.

The financial regulator treats this seriously enough to require firms to spell it out. FCA rules on cash warnings require firms to give consumers an illustration of how inflation erosion would affect a pot over time, using a measure of inflation generally accepted in the UK, and the rules note that the Consumer Prices Index may be used as that measure¹⁴. The same rules require a warning that the value of a drawdown pension fund is at risk of being eroded by inflation¹⁴. The page on real returns on savings works through the arithmetic.

Rents and inflation: how private rents are rising

Rent is one of the clearest places where inflation is felt directly. The ONS publishes the Price Index of Private Rents (PIPR), which measures private rent inflation for new and existing tenancies, so it captures rises as they pass through to tenants rather than only new lets¹⁵. In the 12 months to August 2026, average UK monthly private rent increased by 3.8%, to £1,400, a provisional estimate¹⁶. That was up from 3.3% in the 12 months to June 2026¹⁵.

The rate varies sharply by region. In the 12 months to August 2026, private rent annual inflation was highest in the North East and North West of England, at 5.8%¹⁷. London's annual rate rose to 3.5% in the 12 months to August 2026, up from 3.0% in the 12 months to July¹⁶. Northern Ireland's annual rate has been generally slowing since a record-high annual rise of 9.9% in April 2024¹⁶.

Renters also show up in the Household Costs Indices. Private renter households saw an annual HCI inflation rate of 3.8% in the year to December 2025¹⁸, having had the highest annual rate of 3.6% in March 2025¹⁹. Earlier in the series, private renters' HCI rate was 4.6% in the year to March 2024²⁰ and 3.2% in the year to June 2024²¹. The Scottish Government's economic bulletin noted that private rental costs contributed 1.59 percentage points to the annual rate of inflation for private renters in September 2025²². The page on private rents covers how the figures are collected.

Where the headline figure may not match your own costs

The CPIH is an average, and the ONS notes it broadly reflects the experience of households around two-thirds of the way up the expenditure distribution²³. It is not, and is not meant to be, any one household's personal rate. Household-specific price indices are not currently available because price data are collected from retailers rather than from households²³.

The ONS fills part of this gap with the Household Costs Indices, which reflect how different household groups experience inflation across income deciles, tenure types, retirement status, and households with and without children²³. The differences between groups are usually smaller than people expect. Over the five years to June 2026, cumulative inflation was 32.8% for high-income households and 32.7% for low-income households¹¹. In the year to March 2024 the gap between high- and low-income household HCI rates was 1.1 percentage points, narrowed from 1.4 percentage points in October and November 2023²⁰.

At moments of sharp price shocks the gaps widen. In 2022, when inflation hit what a Scottish Parliament committee report called "a 40-year high, driven by sharp rises in energy bills and the highest food price inflation in a decade", the Institute for Fiscal Studies estimated that the bottom ten percent of earners faced inflation above 10 per cent²⁴. The cost of living crisis page covers that period in full.

The 2% target and how inflation has moved since 2022

The Government sets the Bank of England a target of getting inflation to 2%³. The Bank's statutory objective is monetary (price) and financial stability²⁶, and its main tool is Bank Rate, which it describes as "the core interest rate in the UK and it is our job to set it"²⁷. The pages on the inflation target and the Monetary Policy Committee explain how the mechanism works.

The recent history of CPI inflation shows how far and how fast the rate has moved:

The annual rate of inflation peaked at 11.1% in October 2022²⁸, which the Scottish Government describes as the highest rate for 41 years²⁹. CPI then gradually reduced to reach the Bank of England's target rate of 2% by June 2024²⁹, and fell to a low of 1.7% in September 2024³⁰. It then rose again to a post-election peak of 3.8% in July, August and September 2025, falling back slightly to 3.6% in October 2025³⁰, and stood at 3.1% in August 2026⁸.

Looking forward, the Bank of England is projecting inflation to peak at 3.2% in the fourth quarter of 2026³¹. An earlier projection from the November 2025 Budget round had inflation judged to have peaked and projected to slow to 3.2% by March 2026³⁰. Forecasts are revised as new data arrives, so treat them as projections rather than promises.

When the next inflation figures are published

Consumer price inflation figures are published monthly. Price collection usually happens on the second or third Tuesday of the month, and publication takes place four or five weeks later; the ONS states that publication has never been delayed or missed⁴. For example, the July 2026 figures were released on 19 August 2026¹⁰. The next consumer price inflation release is scheduled for 21 October 2026³².

Two related releases follow their own calendars. The Household Costs Indices are quarterly, with the next release on 27 November 2026¹¹. The UK House Price Index is published on the second or third Wednesday of each month, with Northern Ireland figures updated quarterly³³.

The latest inflation figures page is updated with each release, and the wider rates and economy guide puts inflation alongside Bank Rate, borrowing costs and the labour market.