Inflation is one of those numbers that arrives every month and is immediately argued about. One headline says it is falling; another says prices are still climbing. Both can be true at once. The Office for National Statistics publishes the data, but the coverage rarely pauses to explain what is being measured. Learn which figure is which — and, more usefully, how much of it applies to your own outgoings — and the monthly release stops being noise and starts being information.
What an inflation figure is actually measuring
The ONS tracks the prices of a large basket of goods and services that a typical household buys, from bread and bus fares to broadband and haircuts. Each item is given a weight based on how much of the average household budget it accounts for. The headline number is the change in the cost of that whole basket over the past 12 months.
Two things trip people up. First, the headline is an annual rate: it compares prices now with prices a year ago. It is not a month-on-month shopping comparison, and it will not match the change in your own basket. Second, a fall in inflation is not a fall in prices. If the rate drops from 4% to 3%, the items in that basket are still around 3% more expensive than a year earlier. Prices only actually come down when the rate goes negative — deflation — which brings its own problems, including delayed spending and squeezed profits.
Weightings matter too. Housing, food and transport take up a bigger share of the basket than clothing or books, so a jump in energy costs pushes the headline further than a sale on furniture. The weights are updated each year to reflect what households really buy, which is why the basket quietly changes over time.
CPI, CPIH and RPI: which number are you reading?
There is no single inflation rate. There are several, measuring slightly different things, and mixing them up leads to bad conclusions.
- CPI (Consumer Prices Index) — the headline measure, and the one the Bank of England's 2% target refers to. It covers a broad basket including rent, but excludes mortgage interest payments, Council Tax and the housing costs of owner-occupiers.
- CPIH — CPI plus owner-occupiers' housing costs, estimated using what it would cost to rent an equivalent home. It holds National Statistics status and is the ONS's preferred measure of consumer price inflation.
- RPI (Retail Prices Index) — the older measure. It includes mortgage interest payments and Council Tax, and has generally run higher than CPI. It lost its National Statistics accreditation in 2013 because of known flaws in its formula, although it still appears in some contracts, index-linked gilts and pension rules.
If a figure is quoted without a label, check which index it belongs to before comparing it with anything else. CPI and RPI are not interchangeable, and a wage deal or a rail fare tied to one may behave quite differently from the headline you saw on the news.
Core inflation: the number behind the number
Headline inflation gets pushed around by things nobody controls — oil prices, a poor harvest, a change in the energy price cap. Core inflation strips out energy, food, alcohol and tobacco to show the underlying trend. Services inflation is watched closely as well, because wages make up a large share of what services cost, and service prices tend to move slowly.
Why bother with them? Because the measures tell different stories. A falling headline rate driven by cheaper energy, alongside stubborn core inflation, suggests price pressures are still working through the economy. A falling headline and a falling core rate together suggest the squeeze is genuinely easing. One month proves very little either way. Three or four months start to form a pattern.
Reading a release without getting fooled
Base effects
Annual inflation compares today with a year ago. If something spiked 12 months back and has since settled, that spike drops out of the calculation and the annual rate falls — even though nothing changed this month. It is arithmetic, not relief. Energy bills are the classic example: a sharp rise a year ago can make this year's rate look tame by comparison.
Monthly figures are noisy
The ONS also publishes month-on-month changes, and they bounce around. A single monthly move can be caused by school holiday timing, a change in when Easter falls, or one large unusual price change. Traders watch them; households do not need to.
Your inflation is not the average
The basket reflects average spending across all households. If you rent rather than own, run a car, or have young children, your personal inflation rate could be well above or below the headline. You cannot easily calculate it, but you can track the handful of costs that dominate your budget — housing, energy, transport and food — and judge the trend from those.
What it means for a household budget
The most useful question is whether your income is keeping pace. Compare your pay rise with the inflation rate over the same period; if your pay rose 3% while prices rose 4%, you are slightly worse off in real terms, even though your salary went up.
Beyond pay, a few areas move with these figures:
- Savings. If your savings rate is below inflation, the money buys less over time. Check the rate on easy-access accounts at least once a year, and remember that tax treatment depends on your circumstances.
- Borrowing. Fixed-rate mortgages are unaffected until the fix ends. Variable, tracker and standard variable rates respond to the Bank of England's decisions, which in turn respond to inflation.
- Benefits and the state pension. Uprating usually follows the previous September's CPI figure, so an autumn release can shape next April's payments.
- Bills. Regulated energy prices and water charges are set through their own processes, but inflation data feeds the debate around them.
For anything involving mortgages, investments or retirement planning, a regulated financial adviser can look at your circumstances properly. Free, impartial guidance is also available from MoneyHelper.
How to use the next release
The figures land once a month, usually mid-month, covering the previous month. Rather than skim the headline, run through these steps:
- Note the annual CPI rate and the month it covers, so you know exactly what you are comparing.
- Check core inflation and services inflation alongside it. If they are moving in the same direction, the signal is stronger.
- Read one line of context in the release — what actually drove the change. Energy, food and transport usually explain most of it.
- Compare the rate with any pay award, benefit uprating or savings rate that applies to you, using the same 12-month window.
- Write down what you will do about it: switch a savings account, revisit a budget line, or simply note it and move on.
Do not overhaul your finances because of one month's number. Inflation data is a trend, not a verdict, and the practical value comes from spotting which direction things are heading over several releases — and whether your own costs are travelling with them.
