What is inflation?

Inflation is the rate at which prices rise over time. When inflation is 3% a year, something that costs £100 today will cost about £103 in a year's time — and the £100 you hold today will buy less than it did. Over long periods, even low inflation steadily erodes the purchasing power of cash.

The UK's headline measure is the Consumer Prices Index (CPI). The latest 12-month CPI inflation was 2.9% in July 2026, above the Bank of England's 2% target. Office for National Statistics — Consumer price inflation

How inflation eats your savings

Here is what £1,000 would be worth in today's money after different periods and inflation rates:

Inflation rate10 years20 years30 years
2% (BoE target)£820£673£552
3%£744£554£412
5%£614£377£231

In other words, if inflation averages 3% for 20 years, £1,000 today will buy roughly the same as £554 buys now. Money sitting in cash that earns less than inflation is silently losing value.

What you need to beat inflation

To keep your purchasing power, your money needs to grow at least as fast as inflation. The table below shows how much you would need to have at the end of each period to match the buying power of £10,000 today:

Inflation rate10 years20 years30 years
2%£12,190£14,859£18,114
3%£13,439£18,061£24,273
5%£16,289£26,533£43,219

So at 3% inflation, £10,000 today needs to become about £18,061 in 20 years just to buy the same things. This is why long-term savings and pensions need returns above the inflation rate to grow in real terms.

CPI vs RPI vs CPIH

The UK publishes several inflation measures. CPI is the headline measure used for the Bank of England target and most official comparisons. CPIH adds owner-occupiers' housing costs and was 3.1% in July 2026. RPI is no longer a national statistic but is still used for some index-linked products. For everyday planning, CPI is the measure to use.

Does the calculator forecast inflation?

No. The UK Inflation Calculator is a what-if tool — you choose an inflation rate and it shows the effect on purchasing power. It does not predict future inflation. The Bank of England targets 2%, and actual rates have ranged widely, so it is sensible to test your plans at 2%, 3% and 5%.

Frequently asked questions

Why does cash lose value with inflation?
Because prices rise, each pound buys less over time. If you hold cash that earns no interest, its purchasing power falls by the inflation rate every year — £1,000 at 3% inflation loses about 3% of its real value a year.
What inflation rate should I use?
For planning, the Bank of England's 2% target is a reasonable central case, but testing 3% and 5% is more cautious. The latest 12-month CPI figure was 2.9% in July 2026 — inflation can move well above or below any single number.
Does inflation affect my savings and pension?
Yes. If your savings or pension grow slower than inflation, your money buys less in real terms. Many pension calculators show results in today's money for this reason, and most people aim for investment returns comfortably above inflation.
What is the difference between CPI and RPI?
CPI and RPI measure prices using different baskets and methods, so they give different figures. CPI is the official headline measure; RPI is no longer a national statistic but is still used for some index-linked products and bonds.
Educational tools only — not financial advice. Rates and allowances for the 2026/27 tax year, shown as at September 2026. Rules can change — always verify against the latest official guidance.