Inflation is the rate at which the general price level of goods and services rises over time, reducing the purchasing power of money. If inflation is 5%, something that costs £100 today will cost £105 in a year.
The main measures: CPI (Consumer Prices Index) — the official inflation target measure, based on a basket of 700+ goods and services. CPIH — CPI including housing costs. RPI (Retail Prices Index) — older measure, typically higher than CPI, used for some contracts and rail fares.
Money in a savings account earning below the inflation rate is losing real value. A savings account earning 3% when inflation is 5% produces a real return of -2%. This is why investing in assets that historically outpace inflation (stocks, property) is part of long-term financial planning, while cash savings are appropriate for short-term needs and emergency funds.
Track your household costs with our free household budget template.