Inflation and interest rates in the UK, explained

Last reviewed October 23, 2026

What is inflation?

Inflation is the rise in the prices of everyday things over time. The Office for National Statistics measures it with the Consumer Prices Index (CPI), the cost of a typical basket of goods and services.

If prices rise faster than your pay or your savings, you’re getting poorer without noticing.

You’ll also see RPI, an older measure that’s usually higher than CPI. It’s still used for a few things, such as the interest on student loans. Each April, the State Pension rises under the triple lock, by the highest of earnings growth, CPI inflation or 2.5%.

Try it: what inflation does to your moneyMove the sliders to change the inflation rate and the number of years.

Inflation a year3%

Years10

£100 kept as cash would buy

£74

of today’s shopping

Something costing £100 today

£134

in 10 years

At 3% a year, prices double about every 23 years.

Why the Bank of England changes rates

The Bank’s Monetary Policy Committee sets Bank Rate, which other interest rates follow.

When inflation is above target, it raises Bank Rate. Borrowing costs more, people spend less, and price rises slow.
When the economy is weak, it cuts the rate to encourage borrowing and spending.

What it means for you

What you have	When Bank Rate rises
Savings account	Pays more, though banks don’t always pass it all on
Tracker or variable-rate mortgage	Payments go up, usually from the next month
Fixed-rate mortgage	No change until your deal ends, then you pay the new rates
Credit card, overdraft	Usually little change: rates are already high
New mortgage or loan	Costs more to take out

Fixed mortgage rates follow what markets expect Bank Rate to do, so they can move before the Bank does. The big risk for most homeowners is the end of a fixed deal: remortgage in good time rather than sliding onto your lender’s standard variable rate.

Beating inflation

What matters is your real return: what your money earns after inflation. Savings paying 4% when inflation is 3% grow by about 1% a year in real terms.

Keep your emergency fund in a good easy-access account or Cash ISA.
For goals more than five years away, investing has historically beaten inflation by more. See investing basics.

Frequently asked questions

What is the Bank of England’s inflation target?

2% a year, measured by the Consumer Prices Index (CPI). The government sets the target, and the Bank’s Monetary Policy Committee changes Bank Rate to try to meet it.

What is the difference between CPI and RPI?

Both measure how prices change, but they’re worked out differently and RPI is usually higher. CPI is the official measure for the inflation target and for uprating most benefits. RPI is still used for some things, such as student loan interest and some index-linked bonds.

How does Bank Rate affect my mortgage?

Tracker and variable-rate mortgages usually change soon after Bank Rate does. A fixed-rate mortgage stays the same until the deal ends, then you pay whatever rates are on offer when you remortgage.

Should I fix my mortgage when rates might fall?

Nobody knows for sure where rates will go, and fixed rates already reflect what markets expect. A fix gives you certainty over your payments; a tracker can fall if Bank Rate does, but can rise too. Choose the one you could afford if you’re wrong.

How do I protect my savings from inflation?

Keep your emergency fund in an account paying a good rate, ideally at or above inflation, and use a Cash ISA if you’d pay tax on the interest. For goals more than five years away, investing has historically beaten inflation by more.