The Consumer Price Index (CPI) is the main measure of inflation and this shows how the prices of goods and services have changed over time – here is what it means for you
The rate of inflation for the 12 months to February has been confirmed by the Office of National Statistics (ONS) today. The consumer price index (CPI) level of inflation now currently stands at 2.8%.
This is a fall of 0.2 percentage points compared to January’s level of 3%, which was the highest the UK had seen in 10 months. It is also above the UK’s target level of 2%. Last month’s level forced the Bank of England to hold its base rate at 4.5% last week rather than cut it.
Today’s inflation figure comes as Chancellor Rachel Reeves is set to share her Spring Statement. The drop is lower than expected, as analysts believed it would drop to 2.9%. It’s important to note with the drop today that prices are not going down, they are just rising at a slower rate.
What is inflation?
Inflation measures how prices have changed over time. For example, if something cost £1 last year but now costs £1.03, then the rate of inflation on that particular item is 3%. However, it’s important to note that when inflation goes down, it does not mean prices are falling – it just means that prices are rising but at a slower rate.
The main CPI figure is used as an average – so individual prices of some goods may be higher or lower than this. The Office for National Statistics (ONS) releases inflation data every month and uses a “basket of goods” and services, which are regularly updated, to track prices.
The link between inflation and interest rates
The Bank of England uses the base rate to control inflation in the UK. The Consumer Price Index (CPI) measure of inflation represents how the price of goods has changed over time and when inflation rises – prices go up.
When inflation is low, stable, and predictable, it helps people and businesses better plan their savings, spending, and investments. This, in turn, helps the economy grow – which is what governments always want. The goal is to keep inflation as close to 2% as possible – so the bank will act if price rises are too low as well as too high.
The Bank of England began raising interest rates in 2021 to try and bring inflation down. The theory is that when interest rates go up, the cost of borrowing becomes more expensive – then, in turn, people should then spend less, bringing demand and prices down. The base rate stood at just 0.1% in December 2021 and rose to 5.25% in August 2023. It remained the same until August 2024, when it was cut by 0.25 percentage points to 5%, and since then, it has fallen to 4.5%.
Why did inflation peak?
Inflation began to rise in 2021 and peaked at 11.1% in October 2022. The steady increase was largely due to higher costs of energy and food. Demand for energy increased after Covid, and this was exasperated by the Russian invasion of Ukraine. The war also pushed up food prices, due to rising costs for fertilisers and animal feed.
Both energy and food prices have come down in recent months, although they are still higher than before. The UK has been trying to keep inflation stable over the last 12 months, although external factors have pushed it higher since the end of last year.