NEW! Our Hero’s Journey tool can help you with your next step towards financial freedom - click here to try now.
Advertiser Disclosure

What is inflation?

What is inflation?
Image source: Getty Images

What is inflation, anyway? It’s a word we hear pretty often, but it’s not always clear what it means. Here’s a rundown of the basics – and why inflation matters to us all.

Plot your path towards financial freedom with our Hero’s Journey tool!

MyWalletHero is here to help you learn about taking control of your money, whether that’s paying off debt, working towards a short-term money goal, or investing for your future.

This tool can help you understand the next steps on your journey – simply choose a goal that best describes your current interests to get started.

What is inflation?

It’s basically just an increase in the price of goods and services over time. For example, maybe you’ve noticed you’re paying £1 for a pint of milk now rather than, say, £0.98 a few months ago.    

It has a few causes: 

  • Demand exceeding supply (i.e. there’s not enough of a product or service to go around. Consumers are willing to pay more, so businesses can raise prices)
  • Raw materials increasing in price, which means it costs more to manufacture a product
  • The government being in debt and printing more of its own money to cover its spending  

The main problem? If wages don’t keep pace with the rate of inflation, people can’t afford to shop the same, and there’s a drop in living standards.

On the other hand, if prices go down over time, it’s called deflation. While deflation can drive prices down, it suggests there’s less demand for goods and services, which isn’t a sign of a healthy economy.

How is it measured?

To measure inflation in the UK, we usually rely on the Consumer Price Index (CPI) produced by the Office for National Statistics.

The CPI compares the price of thousands of common items, from chicken to alcohol. To make the result as accurate as possible, the CPI gives more weight to popular commodities like fuel than it gives, for example, to seasonal items. 

4 iron-clad rules for saving money on everything

Our Editor Sam Robson has been on a personal cost-cutting mission for years – and it’s time to share his wisdom.

Check out his choicest saving tips and tricks in this free report, “Sam’s 4 Iron-Clad Rules For Saving Money On Everything”.

Just enter your email below for instant access to your free copy.

By checking this box and submitting your email address, you agree to MyWalletHero sending you emails with money tips, along with details of products and services that we think might interest you. You can unsubscribe from future emails at any time. You also consent to us processing your personal data in line with our privacy policy, and our cookie statement. For more information, including how we collect, store, and handle personal data, please read our Privacy Statement and Terms & Conditions.

The number generated by the CPI is the rate targeted by the Bank of England. It’s the institution responsible for keeping inflation as stable as possible.

What’s the UK’s inflation rate?

The UK government sets a 2% target for inflation, but right now, the UK inflation rate is only 0.7%. Why? Well, it’s mainly down to the impact of the coronavirus pandemic and lockdown restrictions

For example, retail prices fell as customers stayed away from the high street, and huge shopping chains like Debenhams closed. What’s more, fuel prices dropped as more of us stayed home, and fare income fell dramatically across the transport network.

It’s a challenging time for the UK economy, and we can see this reflected in the inflation rate. 

How does inflation affect me?

Okay, so that’s what inflation is and how it works. But how does it affect you, in real terms? Let’s take a look. 

  • Do you have a savings account? When inflation’s low, you earn less interest on your money than when rates are higher. It doesn’t mean you shouldn’t save (because you should), but your money’s worth a little less when inflation is low.
  • Low inflation can drive down prices, which is good news if you’re making purchases. That said, the longer the inflation rate stays low, the likelier it is to result in redundancies.   
  • When inflation rates are low, it can make it cheaper to get a loan. However, you should still stick to a budget – don’t take out more credit than you can afford.


Some inflation is a good thing because it encourages people to spend money which keeps the economy going. On the other hand, if it’s too low, it’s a sign that there’s less demand for goods and services, which can lead to unemployment in the long run.

Should you care about inflation? Yes, absolutely. It affects how much your money is actually worth. In the meantime:

  • Try to keep saving money where you can.
  • Where possible, ensure the interest rate on your savings account is the same as or higher than the inflation rate. Otherwise, the value of your money falls over time.

Reviewed and rated 4 stars out of 5 by MyWalletHero

Need a financial adviser? Get a free initial review lasting up to 1 hour, plus £50 off any follow-up advice.

MyWalletHero has sourced you a £50 discount off the cost of advice when you find an independent or whole-of-market financial adviser through*. All advisers are FCA-regulated, qualified and give fully unbiased advice. To find yourself an adviser fast and for free – use the Unbiased matching tool.

*This is an offer from one of our affiliate partners. For more information on why and how we work with partners, click here.

Was this article helpful?

Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.