Understanding Inflation and Its Impact on Your Life: An Examination

Unleashing the Inflation Beast: A Glimpse into the UK's Economy

Got your attention? That's what inflation does, loves to be the talking point of the town! You've likely heard of it in connection with the government, the Bank of England, and the economy, specifically the interest rates. But what really is inflation, and what does it mean for our wallets?

In simple terms, fluctuations in inflation measure how much the cost of all the goods and services we buy on a daily basis has risen, from our morning coffee to a well-deserved holiday. After hitting a peak of 11.1% back in October 2022 and settling at the Bank of England's desired 2% target last year, inflation has been stubbornly high recently, exceeding the goal level.

Following a low of 1.7% in September 2024, inflation (as reported by the Consumer Prices Index) climbed to 2.8% in February 2025, and it’s expected to climb further as the year progresses due to rising global energy prices and the lingering impact of Trump's trade policies.

In charge of keeping tabs on inflation to help them make decisions on interest rates is...yes, you guessed it - none other than the Bank of England! They anticipate prices to swell by approximately 3.75% by the third quarter of this year, before falling back to the 2% mark at the start of 2026.

But let's not jump the gun, the inflation data for March 2025 will be revealed on April 16, so stay tuned! Now that we've got a better sense of what inflation is, let’s dive deeper into thekey issues and how it can affect our finances.

Decoding Inflation: A Closer Look

Inflation can be seen as a measure of how much the cost of our spending power has changed over a specified period. If a product cost £1 this time last year and inflation currently stands at 10%, you can bet that same product will likely cost £1.10 now. This metric is quite important, as it's used to calculate key factors such as rail fares, utility bills, and even the state pension amount.

Why, you may wonder, is a little inflation a good thing? Economists believe it encourages spending and keeps our beloved GDP growing. Yet incredibly high inflation can cause some serious damage to living standards, as we’ve recently experienced during the cost-of-living crisis. Meanwhile, deflation, the opposite of inflation where prices decrease, can lead to reduced consumer spending, potentially triggering a recession, and increased unemployment rates.

Disinflation, Deflation, and the Difference

Despite the recent rise in inflation above the Bank of England's 2% target, it has slowed significantly from its peak (11.1%). This doesn't necessarily mean we're now in a state of deflation, but rather a period of disinflation, where the rate of inflation is slowing but still remains above zero.

This is important to keep in mind, as disinflation doesn’t mean prices are decreasing, just that they are increasing at a slower pace compared to before. Deflation, on the other hand, occurs when the inflation rate drops below zero, and we're not experiencing that at the moment.

The Nitty-Gritty of Inflation Calculation

Every month, the Office for National Statistics (ONS) meticulously checks the prices of hundreds of everyday goods and services in a hypothetical shopping basket. This basket represents the average spending patterns of the average British consumer, though it's far from perfect.

Items like milk, bread, fruit, electrical gadgets, clothes, energy bills, flights, train tickets, and accommodation are part of this magical basket. The ONS updates this basket annually to reflect changes in UK spending patterns and living needs. This year, some additions include VR headsets and yoga mats, while DVD rentals and newspaper adverts have been replaced.

Inflation is presented through multiple indices, with the most commonly reported being the Consumer Prices Index (CPI). Unlike other indices such as the Retail Prices Index (RPI) and the Consumer Prices Index including Owner Occupiers' Housing Costs (CPIH), the CPI excludes housing costs like council tax and rent payments, making it an internationally recognized measure of inflation.

The Effects of Inflation on Your Wallet

Inflation influences different people differently and depends on individual spending patterns. Regardless of who you are, however, price hikes will have an impact on your budget and potentially reduce the number of things you can afford.

Some people, like senior citizens on a fixed income, will likely spend more on essentials like heating and food compared to a young professional. But everyone will experience the impact of price increases in one way or another.

Inflation is also used to set prices for various government and private services. For instance, train fares increase according to the inflation rate, rail fares rise every year in theory so they don’t lose out to the erosion of the value of the pound.

It's helpful to consider the rate of inflation when asking for a salary increase or adjusting rent prices. To maintain or even outperform inflation on the savings front, it's crucial to find an account that can deliver some inflation-beating returns for you. Discover our round-up of top-notch savings options that can help you combat inflation in a smarter way, including easy-access accounts, one-year savings bonds, regular saver accounts, and cash ISAs.

Upcoming Inflation Data Releases

The ONS reveals the latest inflation figures each month, and you can see our calendar of CPI release dates to keep track of upcoming reports. The data is revealed at 7 a.m. sharp, so set those reminders!

A Glimpse into the Future

Inflation is expected to continue its upward trend over the course of 2025, potentially reaching 3.75% in the third quarter, according to the Bank of England's recent forecast. Higher global energy prices and the aftermath of Trump's tariff regime are the main drivers of this increase.

Interested in learning more about what the future holds for inflation? Check out our analysis on the outlook for UK inflation in our separate piece.

Is Stagflation Around the Corner?

There's certainly been a lot of talk about stagflation recently, as some economists fear the UK could experience it in the near future. Stagflation refers to an economic predicament in which stagnant economic growth, coupled with high inflation and unemployment, threatens the overall wellbeing of a country's population.

Even though some economic indicators mimic the signs of an environment on the verge of stagflation, we're still far from the 1970s-style economic crisis of that era. To better understand what stagflation is and what can be done to prevent it, read our comprehensive guide on the topic. Stay informed, stay ahead, and let's weather this storm together!

Enrichment Data:

As of April 2025, the UK's annual inflation rate, measured by the Consumer Price Index (CPI), has reached 3.5%, marking a significant increase from the 2.6% recorded in March 2025.[2][3]

The largest contributors to this rise include: - Housing and Utilities: An increase in electricity and gas prices, largely due to the rise in the Ofgem energy price cap introduced in April 2025[3] - Transport: The introduction of Vehicle Excise Duty on both old and new electric vehicles starting in April 2025[3] - Recreation and Culture: Influenced by rising costs for foreign holidays[3] - Food and Beverages: Increases in prices for meat, mineral water, bread and cereals, and sugar and jam[3]

Forecasts suggest that inflation will continue to rise temporarily before easing:

Office for National Statistics (ONS) and Recent Forecasts: The inflation rate is expected to peak before gradually falling back to around the 2% target. The Bank of England predicts inflation will rise to 3.5% by Q3 2025 and then ease back to 2% by Q1 2027[5]*

Office for Budget Responsibility (OBR): Inflation is expected to rise to 3.2% in 2025, with a peak in monthly CPI inflation at 3.8% in July 2025, before returning close to the 2% target.*

Several factors are driving these inflation trends:

Energy Prices: The rise in energy costs due to the Ofgem price cap adjustments is a significant contributor[3]*

Regulated Prices: Increases in water bills and other regulated services are also contributing[1]*

Economic Factors: The broader economic environment, including global economic conditions and monetary policy decisions, influences inflation[5]*

Protectionist Policies: External factors like the introduction of protectionist tariffs by the US may impact investor expectations and international trade, potentially affecting inflation indirectly[1]*

When setting their interest rates, the Bank of England takes into account the fluctuations in inflation, which measures the cost changes for various goods and services such as property, bonds, and personal finance items.
High inflation can negatively impact personal finances, as it may cause price increases in essentials like housing and utilities, transportation, recreation, and food and beverages, ultimately reducing people's purchasing power.
Senior citizens on a fixed income are often greatly affected by inflation, as they may not be able to adjust their expenditures to accommodate price hikes in essential goods and services.
To maintain purchasing power and beat inflation, an individual should look for savings options like one-year savings bonds, regular saver accounts, and cash ISAs that offer returns higher than the current inflation rate.