inflation

UK Inflation Rate 2026

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Current UK Inflation Rate 3.4%

 

Other measures of inflation

Inflation Forecasts 2026?

inflation-fan-chart

Inflation is forecast to fall to around 2.5% by the Bank of England. This is due to:

  • Weak economic growth
  • Falling cost-push inflation factors
  • Big energy price rises are moving out of 12 month index
  • Return of low inflationary pressures that we saw in the 2010s – weak growth.
  • Global inflation is generally low because of weak demand and low oil prices

Price Level and Inflation

Another way of understanding inflation, is to look at price level. WHen inflation is 10%, the price level rises 10% over 12 months. When inflation falls to 2%, the price level is rising at just 2%.

So even when inflation comes down, households are facing permanently higher prices.

Reasons for low inflation in the UK 2009 until 2021

  • Low worldwide inflationary expectations. Europe is experiencing very low rates of inflation.
  • Fall in global inflation rates since 2007.
  • Reduced consumer spending due to Covid downturn
  • Weaker commodity price growth.

Reasons for Surge in inflation during 2022/23

  • Rising oil/gas prices
  • Ukraine war disrupting gas/energy and food supplies.
  • Lingering supply side issues from Covid lockdowns and impact on price of shipping.
  • Excess demand at the end of Covid as households spend savings when economy opens up.

Inflation Calculator – How Inflation Erodes the Value of Money

UK Inflation Calculator

Convert an amount from one year to another (1800–2025)

 

Based on annual UK inflation (CPI-style) 1800–2025. Results are approximate.

With this calculator, you can see how £830 in 1950, would be worth £40,096.51 in 2025. In other words, inflation reduces the value of money.

Inflation trends in the UK

uk-inflation-1900-2025

 

1970s Inflation

The 1970s frequently saw double-digit inflation. This was due

  • Cost-push factors - rapid rise in oil prices
  • Rising wages due to powerful trade unions trying to keep up with living costs.
  • Lack of independent monetary policy
  • Inflation expectations rose

Late 1980s inflation

The inflation of the late 1980s was due to

  • Rapid economic growth 'The Lawson Boom' - growth was above the trend rate causing supply shortages
  • Rise in house prices fuelling wealth effect
  • Lack of independent monetary policy. The policy was partly set by 'shadowing the D-Mark' which led to loose monetary policy in late 1980s

Inflation and wages

  • Real wages = nominal wages - inflation.
  • Usually, during a period of economic growth - wage growth is higher than inflation, this leads to positive real wage growth.
  • During the economic recession of 2009-13 - we had a prolonged period of negative real wage growth. Wages rising at a slower rate than inflation.
  • The end of 2014 saw the first signs of renewed wage growth and positive real wage growth.
wages-inflation-may-25

 

 

Between 2008 and 2023, there has been an unusual period where we have often had negative real wage inflation. (inflation higher than wage growth)

See more at UK wage growth

Inflation and Interest Rates

interest-rates-inflation-aug-25

 

The Bank of England are responsible for monetary policy. They target an inflation rate of CPI = 2% +/-1. They also take into account economic growth.

Usually, with an inflation rate above 2%, you would expect the Bank of England to increase base rates to reduce inflationary pressures. However, since early 2009, the Bank of England kept base rates close to 0.5%. This is because the Bank of England are worried about the depth of the recession. They argued that the increase in inflation (e.g. during 2011) was due to temporary cost-push factors, such as taxes, commodity prices and effects of devaluation. Therefore, they tolerated CPI inflation above target rather than risk a deeper recession.

CPI and RPI

RPI is still published by the ONS, but it is no longer designated as a national statistic.

RPI-inflation-1949-2022

 

RPI includes more items, such as housing and mortgage interest rate costs. It is calculated in a different way to CPIH. See: Definitions of CPI, RPI, RPIX

The ONS also publishes a new measure RPIJ - which involves a new method of calculating RPI

Producer inflation

The producer price index measures the price of manufactured goods as they leave the factory gate.

There is also an input price index which measures cost of raw materials. These are both a guide to future inflationary pressures.

See more at: Input and producer prices

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Fall in Global Inflation Rates

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Since the 1970s, we have seen a fall in average global inflation rates. There have been periods of inflation (often due to rise in oil prices), but the overall trend has seen lower inflation rates. In the 1970s, inflation was seen as one of the main macroeconomic challenges, but in the 2010s, inflation faded from …

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Does inflation cause unemployment?

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Readers Question: Does inflation causes unemployment? There are a few different scenarios where inflation can cause unemployment. For example, an inflationary boom is unsustainable, leading to recession or a period where the inflation rate is higher than wage growth, leading to fall in income and spending. However, there is no direct link. Sometimes there is …

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Why is cost of living in UK so expensive?

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Readers Question: Why is the cost of living in the UK so expensive? The cost of living depends on: The price of basic necessities – food, fuel, heating, transport, housing/rent, entertainment. The effective cost of living also depends on real wages. It is expensive to live in Nordic countries, but real wages tend to be …

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Long-Term inflation forecasts

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Originally published in March 2015. Current inflation rate (Feb 2020) is 1.3%. I was 0.7% out.

But there was no skill in predicting inflation of 2%. If Ii had to predict inflation for 2025, I would predict the same = 2%.

Reader’s Question: What will be the inflation rate in 2020?

Firstly, I can’t resist a few economics ‘jokes’

  • “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. “
  • “The First Law of Economists: For every economist, there exists an equal and opposite economist.”
  • The Second Law of Economists: They’re both wrong.
  • Q:Why did God create economists ?
  • A: In order to make weather forecasters look good.

To be honest, it is very difficult to make inflation forecasts for more than 12-18 months time. I feel that if you make inflation forecasts for 5 years in advance, you are really just guessing.

There are so many different scenarios which could happen in the next five years, which we can’t envisage at the moment.

uk-RPI-inflation-1948-2014

My Guess for inflation in 2020

After making a sufficiently long list of disclaimers, I’m happy to stick my neck out on the line and make the rather unexciting prediction that inflation will be 2%. (which happens to the government’s target for CPI inflation). The reason for this prediction is:

Generally, we have become quite good at keeping inflation low. The peak in inflation in 2010 to 5% is misleading, because it was just temporary cost-push inflation in the middle of a recession. Since the 1980s, we haven’t seen any significant demand-pull inflation.

Inflation is more likely to be low because:

  • The Bank of England was made independent in 1997. (Previously government set interest rates). Independent Central Banks are willing to take politically unpopular decisions to raise interest rates before an election reducing chance of boom and bust. Independent Central Banks are judged on their success in keeping inflation low, so they don’t want to lose their ‘low inflation credibility’.
  • Inflation expectations have fallen. It would take a big change in the economy (like the cost-push inflation of 1970s) to really shift inflation expectations upwards.
  • There is a strong will to reduce inflation. For example, Europe has tolerated very high levels of unemployment and prolonged economic stagnation – but they wouldn’t tolerate high inflation. I don’t see this changing, there is a very strong consensus on keeping inflation low amongst mainstream economists and politicians.
  • Continued improvements in technology and greater competitiveness of markets (e.g. see how competitive supermarkets have become in past few years.)

The greater concern is that we entering a period of disinflation – very low inflation, below the government’s target of 2%. Experience of the past few years and the experience of Japan suggests that these periods of very low inflation can be self-fulfilling and take a long time to get out of.

Long Range Inflation Forecasts may try to take these issues into account.

  • Are we entering a new era of macroeconomic stability, where central banks have finally mastered the art of managing the economy? The medium-term prospects for greater economic stability are quite promising in this regard. People are already suggesting that the boom and bust economic cycle are a thing of the past in the UK
  • Will a shortage of raw materials cause cost-push inflation? or will alternatives be found?
  • To what extent will new technology continue to lower costs?
  • Will global warming cause a shortage of food and water, therefore pushing up prices of basic necessities?
  • Will overpopulation cause demand to rise faster than supply

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Problems of Deflation

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Deflation is defined as a fall in the general price level. It is a negative rate of inflation. The problem with deflation is that often it can contribute to lower economic growth. This is because deflation increases the real value of debt – and therefore reducing the spending power of firms and consumers. Also, falling …

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Inflation and Exchange Rates

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Readers Question: Why is it that the value of the exchange rate falls when there is higher inflation? How inflation affects the exchange rate A higher inflation rate in the UK compared to other countries will tend to reduce the value of the Pound Sterling because: High inflation in the UK means that UK goods …

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