Inflation explained — why prices rise and what it means for savings

Inflation is the rate at which the general level of prices for goods and services rises over time, meaning the purchasing power of money declines. In the UK, the primary inflation measure is the Consumer Prices Index (CPI).

How CPI is measured

The Office for National Statistics (ONS) tracks prices of approximately 700 goods and services in a representative 'basket' each month. These include food, housing, transport, energy and recreation. When the basket costs more than the previous year, inflation is positive.

What inflation means for money

• Savings: if your savings account pays 2% but inflation is 4%, your money is losing 2% purchasing power per year in real terms
• Mortgages: inflation erodes the real value of mortgage debt — good for borrowers over time
• Wages: 'real wage growth' means wages rising faster than inflation; 'real wage cuts' means wages rising more slowly

Track your savings rate against inflation with our free savings tracker.