Inflation and the 2% target

We are responsible for keeping inflation (price rises) low and stable. The Government has set us a target of keeping the inflation rate at 2%

What is inflation?

Inflation is a measure of how much prices of goods (such as food or televisions) and services (such as haircuts or train tickets) have gone up over time. 

Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate. 

So if inflation is 3%, it means prices are 3% higher (on average) than they were a year ago. For example, if a loaf of bread cost £1 a year ago and now it’s £1.03 - then its price has risen by 3%. 

Use our inflation calculator to find out how prices have changed over the years.
 

 

How inflation is measured

Each month, the Office for National Statistics (ONS) collect around 180,000 prices of about 700 items. They use this ‘shopping basket’ to work out the Consumer Prices Index (CPI). CPI is the measure of inflation we target. 

The Government sets us a 2% inflation target

The Government sets us an inflation target of 2% in order to keep inflation low and stable. So everyone can plan for the future.

If inflation is too high or it moves around a lot, it’s hard for businesses to set the right prices and for people to plan their spending.

But if inflation is too low, or negative, then some people may put off spending because they expect prices to go down. Although lower prices sounds like a good thing, if everybody reduces their spending then companies could go out of business and people may lose their jobs.

 

What happens if we don't meet this target?

If we miss the inflation target by more than 1 percentage point either side of the target we must tell the Government why.

So if the Consumer Prices Index (CPI) inflation rate is more than 3% or less than 1%, our Governor writes a letter to the Chancellor to explain why and he sets out what we will do to get it back to 2%.

We publish the Inflation letters our Governor sends to the Chancellor.

This page was last updated 17 September 2018
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