Inflation and the 2% target

What is inflation?

Inflation is a measure of how much the prices of goods (such as food or televisions) and services (such as haircuts or train tickets) have gone up over time.

Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate.

So if inflation is 3%, it means prices are 3% higher (on average) than they were a year ago. For example, if a loaf of bread cost £1 a year ago and now it’s £1.03 then its price has risen by 3%.

Use our inflation calculator to find out how prices have changed over the years.

How inflation is measured

Each month, the Office for National Statistics (ONS) collect around 180,000 prices of about 700 items. They use this ‘shopping basket’ to work out the Consumer Prices Index (CPI). CPI is the measure of inflation we target. 

The Government sets us a 2% inflation target

To keep inflation low and stable, the Government sets us an inflation target of 2%. This helps everyone plan for the future.

If inflation is too high or it moves around a lot, it’s hard for businesses to set the right prices and for people to plan their spending.

But if inflation is too low, or negative, then some people may put off spending because they expect prices to fall. Although lower prices sounds like a good thing, if everybody reduced their spending then companies could fail and people might lose their jobs.

What happens if we don't meet this target?

If we miss the inflation target by more than 1 percentage point either side of the target, we must tell the Government why.

So if the Consumer Prices Index (CPI) inflation rate is more than 3% or less than 1%, our Governor writes a letter to the Chancellor to explain why and they set out what we'll do to get it back to 2%.

We publish the Inflation letters our Governor sends to the Chancellor.