The short answer
- Consumer prices (CPI) rose by 3.1% in the year to August 2026. The Bank of England’s target is 2%.
- At 3.1% a year, £10,000 kept as cash is worth £7,369 in today’s money after 10 years.
- Something costing £100 today would cost £135.70 in 10 years and £184.15 in 20 years.
- To keep your money’s value, your savings need to earn more than inflation after tax.
What inflation is
Inflation measures how much the prices of a typical basket of goods and services change over a year. If inflation is 3%, the same shopping that cost £100 last year costs £103 now. Prices do not all rise at the same rate: energy, food and rents can move very differently from the average, so your own inflation rate depends on what you buy.
A little inflation is normal in a growing economy. The Bank of England sets interest rates with the aim of keeping CPI inflation at 2%. When inflation is above target, it usually keeps rates higher; when it is below, it can cut them.
CPI, CPIH and RPI
| Measure | What it covers | Used for |
|---|---|---|
| CPI | Consumer prices, excluding most housing costs | The Bank of England target, and most benefit and State Pension uprating |
| CPIH | CPI plus owner-occupiers' housing costs and council tax | The ONS's lead measure |
| RPI | An older index, usually higher than CPI | Some rail fares, older index-linked gilts and some older pensions |
RPI is no longer a national statistic because of known flaws in how it is calculated, and it is due to be brought into line with CPIH from 2030. For planning, CPI is the most useful figure.
Inflation in recent years
- 2010sMostly low
CPI was mostly between 0% and 3%, and briefly negative in 2015.
- October 2022Peak of 11.1%
Energy and food prices drove the highest CPI rate in over 40 years.
- 2024Back near target
Inflation fell sharply as energy prices eased.
- August 20263.1%
Above target again, so cash savings need a good rate to keep up.
In a year of 11.1% inflation, £1,000 in cash loses about £100 of buying power: it buys what £900 bought a year earlier. Sudden spikes are hard to predict, which is why the calculator lets you test several rates.
What inflation does to savings
The balance still reads £10,000, but it buys less each year. At 5% inflation, a decade wipes out almost two-fifths of its value. Even at the 2% target, cash loses about a fifth of its buying power in ten years.
What things will cost
| Today | In 10 years | In 20 years |
|---|---|---|
| £100 | £135.70 | £184.15 |
A £120 weekly food shop would cost about £162.84 in 10 years at 3.1% inflation. If you plan to live on £30,000 a year in today’s money in 25 years’ time, you would need about £55,618 a year in pounds then at 2.5% inflation, or £62,813 at 3%.
Real returns
The real return is what you earn after inflation. The exact formula is (1 + return) ÷ (1 + inflation) − 1. Simply subtracting is close for small numbers but less accurate for large ones.
| Return | Inflation | Real return |
|---|---|---|
| 4% | 3.1% | 0.87% |
| 5% | 2% | 2.94% |
| 10% | 6% | 3.77% |
| 3% | 3.1% | −0.10% |
£10,000 invested at 5% a year for 20 years grows to £26,533 in pounds, but with 2.5% inflation that is worth £16,192 in today’s money. The real gain is still worthwhile, but much smaller than the headline figure suggests.
Tax makes it harder
- Balance in pounds, tax-free£14,802
- In today's money, tax-free (ISA)£10,908
- In today's money, interest taxed at 20%£10,097
- In today's money, interest taxed at 40%£9,341
Tax is charged on the whole interest, including the part that only makes up for inflation. A higher-rate taxpayer earning 4% outside an ISA keeps 2.4%, which is below 3.1% inflation, so their savings shrink in real terms. This example assumes all the interest is taxed; the Personal Savings Allowance (£1,000 for basic-rate and £500 for higher-rate taxpayers) shelters some of it.
How fast money loses value
| Inflation | Years |
|---|---|
| 2% | 35.0 |
| 3.1% | 22.7 |
| 5% | 14.2 |
| 10% | 7.3 |
The rule of 72 gives a quick estimate: divide 72 by the inflation rate. At 3%, prices double in about 24 years.
Pay, pensions and benefits
A pay rise only makes you better off if it beats inflation. A 3% rise on a £35,000 salary with 3.1% inflation is worth £34,966 in today’s money: a small real pay cut.
- State Pension: the triple lock raises it each April by the highest of earnings growth, CPI inflation or 2.5%.
- Benefits: most working-age benefits rise each April in line with CPI from the previous September.
- Private pensions: defined benefit pensions usually rise with inflation up to a cap. Annuities can be level or inflation-linked; a level annuity starts higher but loses value over time.
Frozen tax thresholds
The income tax Personal Allowance (£12,570) and higher-rate threshold (£50,270) are frozen until April 2031. As pay rises with inflation, more of it falls into tax, and more people move into the higher rate. This is often called fiscal drag. It means your take-home pay can rise more slowly than your salary. The salary calculator shows your current take-home pay.
Ways to protect your money
- Where
- Best-buy savings accounts and cash ISAs
- Aim
- A rate at or above inflation
- Risk
- Low, protected by the FSCS up to £120,000
- Where
- Diversified investments in an ISA or pension
- Aim
- Growth above inflation over time
- Risk
- Values rise and fall
- Shop around: easy-access rates vary widely. Moving can add a percentage point or more.
- Use your ISA allowance: £20,000 a year, so interest and growth are tax-free.
- Index-linked gilts: UK government bonds whose payments rise with inflation.
- Pay off expensive debt: a guaranteed saving often far above inflation.
Planning for the long term
A gap of one percentage point between your return and inflation adds up. Cash earning 2% while inflation runs at 3.1% would leave £10,000 worth only £7,248 in today’s money after 30 years. When planning for retirement or another distant goal, work in today’s money and use a real return. That way the target you aim for means something you can picture now.
Inflation and the FIRE calculator
Our FIRE calculator works entirely in today’s money, using a real return after inflation, for exactly this reason.
Using the calculator
- Choose whether to see what your money will be worth or what something will cost.
- Enter the amount, the number of years, and an inflation rate. The default is the latest CPI rate.
- For savings, open “More options” to add an interest rate and any tax on the interest.
- Compare the result at 2%, the latest CPI and 5% to see a range.
Inflation and your savings goals
Any goal with a price tag will usually cost more by the time you reach it. Aim for the future cost, not today’s.
| Goal | Cost today | Inflation | Cost when you need it |
|---|---|---|---|
| House deposit in 5 years | £30,000 | 3% | £34,778 |
| Car in 8 years | £25,000 | 3% | £31,669 |
| A year's tuition fees in 10 years | £9,535 | 2.5% | £12,206 |
House prices and tuition fees do not follow CPI exactly, so treat these as rough guides. House prices in particular can rise much faster or slower than general inflation.
Emergency funds also need topping up. A £6,000 emergency fund left untouched for 5 years at 3.1% inflation covers only what £5,151 covers today. Review it each year and add enough to keep up with your living costs.
Inflation and debts
Inflation erodes the real value of debts as well as savings. A £200,000 mortgage balance in 25 years’ time would be worth £107,878 in today’s money at 2.5% inflation. Since your pay usually rises with prices over time, a fixed sum of debt becomes easier to carry.
This only helps if the interest rate is fixed or low. When inflation is high, interest rates usually rise too, so variable-rate mortgages, loans and credit cards become more expensive. Check what a rate rise would mean for your repayments before taking on new borrowing.
Investing and inflation
Over long periods, shares have usually grown faster than inflation, because company profits and dividends tend to rise with prices. But they can fall sharply, sometimes for years, so they suit money you will not need for at least five years.
- Shares: the best long-run record against inflation, with the biggest swings.
- Conventional bonds: pay a fixed amount, so unexpected inflation reduces their real value.
- Index-linked gilts: payments and capital rise with inflation, but prices still move with interest rates if sold before maturity.
- Property: rents and prices have often risen with inflation, but property is costly to buy and sell.
- Cash: safe in pounds, but only keeps up if the rate after tax beats inflation.
Over a lifetime the effect is large. At 3% inflation, £1,000 in 50 years buys what £228 buys today, which is why long-term savings need to grow, not just sit still.
Common mistakes
- Looking only at the balance. A rising balance can still be losing value if the rate is below inflation.
- Planning in today’s prices but future pounds. Mixing the two can make a goal look easier than it is.
- Forgetting tax. Compare the rate after tax with inflation, not the headline rate.
- Assuming today’s inflation lasts. Inflation changes. Test a range rather than one figure.
- Leaving an inheritance in cash for years. £100,000 held as cash for 20 years at 2.5% inflation is worth about £61,027 in today’s money.
For quick percentage sums, such as the percentage change between two prices, use the percentage calculator.