Inflation

What is inflation? The version nobody tells you

Q: What causes inflation?

A mix of forces. Costs can rise, companies and workers push prices and wages upward, and when the amount of money grows faster than the amount of things to buy, prices rise. Most new money is created by bank lending, so lending booms and inflation are closely linked.

Q: Why is the target 2% and not 0%?

Central banks argue a little inflation keeps the economy moving and leaves room to cut rates in a crisis, while falling prices make people delay spending and make debts heavier. The practical effect is that the pound is designed to lose a little value every year.

Q: Will prices come back down afterwards?

Almost never. When inflation falls, prices are still rising, just more slowly. Actual falling prices, deflation, is rare and central banks actively fight it.

Ask someone older what a Freddo cost when they were at school. For years the little chocolate frog was 10p. Today it is usually 25p or more. The frog did not get bigger. The chocolate did not get better. Something happened to the money.

The short answer

Inflation means prices in general keep rising, so each pound buys a little less every year. The UK measures it by tracking the prices of everyday things. In the year to July 2026 they rose 2.9%. The deeper question, the one rarely explained, is why it keeps happening at all.

The bit everyone is told

Every month the Office for National Statistics checks the prices of a huge basket of things people actually buy: food, bus fares, rent, games, haircuts. It compares the total with a year ago. The change is the inflation rate, called CPI.

In the year to July 2026, prices rose 2.9%. So something that cost £100 last July costs about £102.90 now.

That sounds small. Here is the part the news never adds: it never stops, and it stacks.

Small numbers, big bite

Inflation compounds, which means each year's rise is built on top of the last one. At 2.9% a year, prices rise about 33% in ten years. Flip that round and it means money sitting still quietly shrinks.

Our own sum: £1,000 divided by 1.029 ten times over. Check it on any calculator.

And here is a sentence worth reading twice. The Bank of England's official target is not zero inflation. It is 2% a year, on purpose. At the target rate, prices double roughly every 35 years. The pound is designed to lose value slowly. Economists give reasons for this, mainly that falling prices cause their own damage. But nobody asked you, and hardly anyone is told.

When it went wrong: 2022

Inflation is usually a slow leak. Sometimes it is a burst pipe. In October 2022, UK inflation hit 11.1%, the highest for 41 years. At that speed, money loses a tenth of its buying power in a single year. Energy bills, food, rent: everything jumped, and wages for most people did not keep up. If your family felt suddenly poorer around then, that was not imagination. It was arithmetic.

The version nobody tells you

Now the question the explainers usually skip: why do prices keep rising in the first place?

The standard answers are real. Wars and energy shocks make things cost more to produce. Companies raise prices when they can. Wages chase prices, prices chase wages.

But there is a bigger, quieter force underneath, and you already know it if you have read how banks create money. Almost all new money is created when banks lend. When the amount of money grows much faster than the amount of actual stuff to buy, more pounds end up chasing the same goods, and prices rise. As the saying goes, it is not that things get dearer. It is that money gets cheaper.

Economists such as Richard Werner add one more twist that explains a lot of modern Britain: it matters where the new money goes. Money lent to businesses that build and make things adds goods to the economy alongside the money, so prices stay calmer. Money lent against things that already exist, above all houses, does not create anything new. It just bids up the price of what is already there.

Worth sitting with

The official inflation number does not include the price of buying a house. House prices can double while "inflation" stays low, and for years that is roughly what happened.

So when someone says "inflation is only 2.9%, what are young people complaining about?", you can answer precisely: the biggest price in a young person's life is not fully in that number.

Who wins and who loses

Inflation is not just a weather condition. It moves money between people, quietly.

It tends to hurt people holding cash savings, people whose wages rise slower than prices, and anyone saving up for something big, like a deposit, while the target moves away from them.

It tends to help people who owe large debts, because the debt stays fixed in pounds while pounds get smaller. A £200,000 mortgage is a lighter load after ten years of inflation. The biggest borrowers of all are governments, which is one reason to expect inflation to be tolerated more often than it is defeated.

Notice the pattern. Broadly, inflation punishes people who save cash and rewards those who own things and owe money. Nobody voted for that transfer. It is simply how the machine runs.

The moves

Do the pay rise test. If prices rose 2.9% and your pay rose 2%, you took a pay cut. Nobody will say the words, so you have to do the sum. Same for pocket money, wages and savings rates.
Judge savings by buying power. Money in an account paying less than inflation is shrinking in buying power, even while the number grows. That does not mean do anything reckless. It means know what is actually happening.
Never confuse the number with the feeling. The headline rate is an average of everything. Your own inflation depends on what you buy. Rent and food heavy lives usually run hotter than the average.
Remember the stacking. "Only 2.9%" is a third of your buying power over a decade. Small numbers repeated are how the quiet stuff always works, for you with saving, and against you with inflation and interest.

Check it yourself

The current rate. ONS, Consumer price inflation, July 2026: CPI rose 2.9% in the 12 months to July 2026. Released 19 August 2026.
The 2022 spike. ONS data: CPI hit 11.1% in October 2022, the highest in about 41 years. Search "ONS CPI October 2022".
The 2% target. Bank of England: inflation and the 2% target.
The maths. £1,000 ÷ 1.029¹⁰ = £751. 1.02³⁵ ≈ 2. Any calculator will confirm both.
The money view, from the source. Richard Werner on inflation and where credit goes: Intentional Inflation? And a two minute starter: Why Not Just Print More Money?

Questions people ask

What causes inflation?

A mix of forces. Costs can rise, for example energy after 2021. Companies and workers push prices and wages upward. And underneath it all, when the amount of money grows faster than the amount of things to buy, prices rise. Most new money is created by bank lending, so lending booms and inflation are old friends.

Is 2.9% inflation high?

By recent UK standards it is close to normal and just above the Bank of England's 2% target. But normal still shrinks money: at 2.9% a year, cash loses about a quarter of its buying power in a decade. Low is not the same as harmless.

Why is the target 2% and not 0%?

Central banks argue that a little inflation keeps the economy moving and leaves room to cut interest rates in a crisis, while falling prices make people delay spending and make debts heavier. That is the official reasoning. The practical effect either way is that the pound is designed to lose a little value every year.

Do wages rise with inflation?

Sometimes, eventually, unevenly. There is no rule that they must. In 2022 to 2023 most UK pay rises fell behind prices, which is why people felt poorer. Always compare your rise with the inflation rate before calling it a rise.

Will prices come back down afterwards?

Almost never. When inflation "falls", prices are still rising, just more slowly. The 2022 price jumps are baked in. Actual falling prices, deflation, is rare and central banks actively fight it.