Consumer price index

Over the five-year period through 2025-26, the CPI is forecast to increase at a compound annual rate of 5% to reach 142.5 points. Price inflation is a measure of the annual percentage change in the cost of living, which is represented by the CPI. The CPI is the preferred measure of inflation by the UK government and includes services, housing, utilities, food, and transportation. Consumer price inflation may be driven by either demand- or supply-side factors and policies. Over much of the past decade, aggregate demand has been relatively subdued, relative to the pre-financial crisis era, with supply-side stimuli in large part driving consumer price inflation - commodity prices, tax changes, and the pound sterling exchange rate have all played an important role.

The lack of response to short-term inflationary pressure by the BoE, in part, allowed inflation to remain above target - the base interest rate was raised from 0.5% to 0.75% in August 2018, for only the second time in a decade, with the BoE opting to hold the 0.75% in August 2019. In March 2020, however, the BoE made two pre-emptive base rate cuts - the first on 11 March 2020, to 0.25%, and then on 19 March 2020, to a record low 0.1% - in response to the exogenous economic shock tied to the global COVID-19 (coronavirus) pandemic. The BoE subsequently held the base rate at 0.1% for an extended period to stimulate demand, with conversations of potentially lowering the rate into negative territory common, if the economy looked set to be hit by a further pandemic-induced economic downturn. However, in an effort to tame exponentially increasing inflation, the BoE Monetary Policy Committee (MPC) moved to raise the base interest rate to 0.25% on 16 December 2021 – the first rise in more than three years – and again to 0.5% on 3 February 2022, with the latter representing the first tightening of monetary policy in consecutive BoE Committee meetings since 2004. Citing mounting inflationary pressures, the BoE raised the base rate further on 17 March 2022 (0.75%) and to 1% on 5 May 2022.

Subsequent to the EU referendum, the trade-weighted value of the pound sterling depreciated against key trading currencies (e.g., US dollar and the euro). Consequently, supply chain prices of imported goods rose and pushed up the overall rate of inflation, with the CPI rising by 1.1% in 2016-17. In 2017-18 and 2018-19, the CPI increased by 2.9% and 2.2% year on year respectively, with rising petroleum prices and household costs (e.g., utility bills) remaining significant contributors, albeit partially offset by faster-than-expected wage growth. Competition for workers helped push up wages, as unemployment remained at a at near record lows over 2018-19 and into 2019-20, further supporting growth in demand – the CPI increased by 1.8% in 2019-20. Nevertheless, the CPI inflated by a comparatively slow 0.6% year-on-year in 2020-21. Prices were subdued by a slurry of deflationary factors, such as falling demand due to lower wages during the furloughing of workers and the collapse in global oil prices. Furthermore, government support schemes intended to stimulate demand came at the expense of inflation, by way of lowered prices and subsided costs for consumers.

In 2021-22, annual growth in the CPI accelerated by 4% on an annual basis, whereby a "perfect storm" of the economy reopening – domestic demand accelerated relative to the crux of the pandemic – and supply constraints, caused consumer prices to inflate. In 2022-23, inflationary pressures mounted – the UK 12-month CPI inflation rate hit 11.1% in October 2022 – predominantly driven by supply-side factors, in particular the Russia-Ukraine conflict resulting in both energy commodity price volatility and supply chain disruption in turn unsettling the flow trade flow.

In 2023-24, CPI grew at a slower rate as the Bank of England base rate grew from 4% in March 2023 to a peak of 5.25% in August 2023. When the BoE increased interest rates, loans, mortgages, and credit became more expensive. This discouraged consumer spending and business investment, both of which can fuel inflation.Higher rates made saving more attractive, pulling money out of circulation and reducing overall demand. With less money being spent and borrowed, there was downward pressure on prices, especially in sectors like housing, retail, and services, where demand had outpaced supply.

Inflation continued to cool in 2024-25 as the high interest rate environment helped to moderate economic activity and reduced pricing pressures. As inflation began to decline, the Bank shifted towards a more accommodative stance, reducing the Bank Rate from 5.25% to 5% in August 2024, then to 4.75% in November 2024 and again to 4.5% in February 2025.

In 2025-26, inflation is stabilising somewhat although increases to energy and water prices at the start of the period has negatively contributed to inflation, with minimum wage increases also pushing prices up. Despite inflation spiking at the start of the period, the Bank of England is not expected to increase interest rates as it forecasts CPI to peak at 3.7% by September, then to decline to 2.4% by the second quarter of next year, and to drop further to 1.9% the year after.