## How do we know what the rate of inflation is?

We know the rate of inflation because every month the Office for National Statistics checks the prices of a whole range of items in a ‘basket’ of goods and services.

They record the cost of over 700 things that people regularly buy. The basket includes everyday things like a loaf of bread and a bus ticket. It also includes much larger ones, like a car and a holiday.

The price of that basket tells us the overall price level. This is known as the Consumer Prices Index or CPI.

To calculate the rate of inflation, they compare the cost of the basket – the level of CPI – with what it was a year ago. The change in the price level over the year is the rate of inflation.

You can use our inflation calculator to see how prices have changed over time.

## What does % mean?

% is the sign for 'per cent', which means 'out of 100'.

Here's an example. If something costs £10 and it goes up by 2%, then it would cost £10.20p. That’s an increase of 20p.

If the amount you start with is bigger then the size of the increase will be more, even though the percentage change is the same.

So if something with a price tag of £1000 goes up 2%, it would cost £20 more.

## How has the rate of inflation changed over the years?

The rate of inflation has gone up and down over the years. For most of the last 20 years, it has been about 2%. But it has been higher than that at times. And sometimes it has been lower.

## Is high inflation a problem?

A low and stable rate of inflation helps to create a healthy economy.

The Government sets a target for how much prices overall should go up each year in the UK. That target is 2%. It’s the Bank of England job to keep inflation at that target.

A little bit of inflation is helpful. But high and unstable rates of inflation can be harmful.

If prices are unpredictable, it is difficult for people to plan how much they can spend, save or invest.

In extreme cases, high and volatile inflation can cause an economy to collapse. Zimbabwe is a good example. It experienced this in 2007-2009 when the price level increased by around 80 billion per cent in a single month.

As a result, people simply refused to use Zimbabwean banknotes and the economy ground to a halt.

## What does the Bank of England do to keep inflation stable?

The Bank of England has the job of setting monetary policy – the set of tools used to keep inflation low and stable.

The main way we do that is through interest rates. An interest rate is the amount of money people get on any savings they have. It’s also the charge they need to pay on their loans and mortgages.

So what’s the link between the interest rates and inflation?

Higher interest rates make it more expensive for people to borrow money and encourage them to save. That means that overall, they will tend to spend less.

If people on the whole spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation.

The opposite is also true.

Lower interest rates mean it’s cheaper to borrow money, and there’s less of an incentive to save. This encourages people to spend and increases the rate of inflation.

## How does the Bank of England influence interest rates?

Interest rates work by making it cheaper or more expensive to borrow money, and by making it more or less attractive to save.

We can influence interest rates in two main ways.

One - we set Bank Rate, often referred to as the base rate. This is the single most important interest rate in the UK because it influences all other interest rates.

Two - we can we can buy and sell bonds from financial markets. We mainly buy government bonds, or ‘gilts’. Buying assets in this way is called quantitative easing (or QE). QE enables us to influence the interest rates on savings and loans.