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Inflation

Inflation is the rate of increase in the price of goods and services. The Bank of England is responsible for meeting a target inflation rate to support a stable and healthy economy.

In this section

What is inflation?

Inflation is the rate of increase in the prices of goods and services. It is expressed as a percentage. If inflation is 3%, this means that, on average, the price of goods and services is 3% higher than it was a year earlier.

Limited inflation encourages people to spend sooner, which is good for economic growth – if consumers or business anticipate that prices will fall in the future, they are likely to hold off on spending. 

How is inflation calculated?

Every month, a team of specialists from the Office for National Statistics (ONS) collects around 180,000 separate prices of about 700 items covering everything from food and drink to clothes, furniture and train fares. 

This ‘basket of goods’ is used to calculate the Consumer Prices Index (CPI). The ONS publishes an updated rate every month. This is the inflation measure used in the Government’s inflation target (but there are other measures of inflation). 

What is the inflation target?

The Government sets an inflation target for the Bank of England. 

Current inflation rate

3.0%

  Target 2.0%

Generally, when people feel like spending – in other words when demand for goods and services exceeds supply – inflation tends to rise. When people don’t feel like spending and supply exceeds demand, inflation tends to fall. 

So to meet the inflation target, our Monetary Policy Committee (MPC) changes the official Bank of England interest rate (also known as Bank Rate or the Base Rate). This is the rate of interest that we pay on reserves held by commercial banks at the Bank of England. Generally, banks pass these changes on to customers. So if we raise Bank Rate, these customers tend to receive more interest on savings and/or pay more interest on debt like loans and credit cards, and vice versa. 

So, if inflation looks set to go above target we would probably increase interest rates so people spend less, which tends to reduce inflation. Or if inflation looks likely to fall below target we would probably cut interest rates to boost spending in the economy and help inflation to rise.

If we miss the inflation target by more than 1 percentage point either side – in other words, if the CPI inflation rate is more than 3% or less than 1% – the Governor of the Bank of England must write a letter to the Chancellor. This letter explains why inflation has increased or fallen and what the Bank of England proposes to make sure it comes back to target.

Inflation letters

// News // Letter
Exchange of letters between the Governor and the Chancellor regarding CPI Inflation - December 2016

Exchange of letters between the Governor...

Exchange of letters between the Governor and the Chancellor regarding CPI Inflation - December 2016
// News // Letter
Exchange of letters between the Governor and the Chancellor regarding CPI Inflation - August 2016

Exchange of letters between the Governor...

Exchange of letters between the Governor and the Chancellor regarding CPI Inflation - August 2016
// News // Letter
Exchange of letters between the Governor and the Chancellor regarding CPI Inflation - May 2016

Exchange of letters between the Governor...

Exchange of letters between the Governor and the Chancellor regarding CPI Inflation - May 2016
// News // Letter
Exchange of letters between the Governor and the Chancellor regarding CPI Inflation - February 2016

Exchange of letters between the Governor...

Exchange of letters between the Governor and the Chancellor regarding CPI Inflation - February 2016

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Inflation calculator 

Use our inflation calculator to check how prices in the UK have changed over time, from 1209 to 2017.

What would goods and services costing

£

in

cost in ?

  • How the inflation calculator works

    Our inflation calculator works for amounts between £1 and £1,000,000,000,000 (£1 trillion).

    For example, imagine you want to know what goods and services costing £23.60 in 1975 would have cost in 1985:

    The price index for 1975 = 134.8
    The price index for 1985 = 373.2

    The calculator increases the cost in 1975 by the change in prices between 1975 and 1985 with this formula:

    Cost in 1985 = Cost in 1975 x (1985 price index / 1975 price index)

    £65.33 = £23.60 x (373.2 / 134.8)

    So the cost in 1985 of the same goods and services has risen to £65.33.

  • Average inflation

    The inflation calculator also tells you the average yearly inflation rate between two years. The formula for this, again using the example of 1975 to 1985, is:

    Average inflation = ( ( ( 1985 price index / 1975 price index ) ^ 0.1 ) – 1 ) x 100

    The answer is:

    10.7% = ( ( ( 373.2 / 134.8 ) ^ 0.1 ) -1 ) x 100

    This looks a bit complicated, but it just shows that on average prices rose by 10.7% a year between 1975 and 1985. By the way, “^ 0.1” means that the change in prices is ‘raised to the power of one tenth’ to calculate the average inflation rate over ten years.

  • Deflation

    If prices fell between the two years you put into the calculator, average inflation will be negative. This is called deflation. 

    For example, say you input the dates 1920 and 1933. The calculator reveals that inflation averaged -3.5%, because prices fell in almost every year between 1920 and 1933.

  • Calculator caveats and limitations

    Our inflation calculator is designed for illustrative and general reference purposes only.

    The calculations are approximate, and give a rough guide to the buying power of the pound for goods and services purchased in the UK.

    In order to make comparisons possible over long periods of time, the calculator uses the composite price index published by the Office for National Statistics (ONS). Since there is no single price index available all the way back to 1750, the composite index is produced by linking together price data from several different published sources – both official and unofficial. We update this annually based on the ONS’s annual Consumer Price Inflation (CPI) figure.

  • Accuracy of inflation data

    Over long periods, the definitions of goods and services included in the price index have changed. For example, a family’s food and clothes today are very different to those of a typical family a hundred years ago.

    Changes in household spending also reflect higher incomes and the wider range of goods and services available to buy today. These new goods and services are included in today’s price index, but not in earlier versions.  

    Overall, these features of the data mean that comparisons of prices further back in time and over long periods are less accurate than comparisons over short periods in recent years.

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This page was last updated 23 January 2018
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