See how inflation erodes purchasing power over time — and what a sum of money from the past is worth in today's prices, or vice versa.
UK long-run CPI avg ~2.5–3%. Bank of England target: 2%.
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Original amount
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Equivalent value
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Cumulative inflation
Year
Nominal (original £s)
Real value (today's £s)
Purchasing power
How Inflation Works in the UK
Inflation measures how quickly the general price level of goods and services rises. As prices go up, each pound you hold buys less — your purchasing power falls. The Bank of England targets 2% CPI inflation per year as the long-run equilibrium. When inflation runs higher — as it did in 2022–2023 when UK CPI peaked above 11% — the real value of savings and fixed incomes erodes rapidly.
CPI vs RPI — which should I use?
CPI (Consumer Prices Index): The Bank of England's official target measure. Used for benefits, state pension triple lock and most financial planning. Currently the UK standard for inflation reporting.
RPI (Retail Prices Index): Historically higher than CPI. Includes mortgage interest payments and council tax. Used for student loan interest rates (Plan 2/5), index-linked gilts and some rail fare increases.
Historical UK CPI rates
1990–2000: Average ~3.5% (post-ERM crisis then stable)
2000–2010: Average ~2.3%
2010–2020: Average ~2.0%
2021–2023: Spike to 11.1% peak (energy/supply chain crisis)
2024–2026: Returning to 2–3% range
The real rate of return
The real rate of return on any investment = nominal return − inflation rate. If your savings account pays 4% and inflation is 3%, your real return is only 1%. If inflation exceeds your savings rate, your money loses real value even though the nominal balance grows. This is why long-term investors target assets (equities, property) that historically outpace inflation.
Worked Examples
£1,000 in 2015 — today's equivalent
Original amount£1,000 (2015)
Average inflation3.0% per year
Years11 years
Today's equivalent£1,384
Purchasing power loss−27.7%
£50k salary erosion 2020→2026
Salary in 2020£50,000
Average inflation5.0%/yr (spike era)
Years6 years
2026 equivalent£67,005
Real pay cut if unchanged−25.4%
£100k retirement target — 20 years
Target in today's money£100,000
Inflation assumption2.0% per year
Future nominal needed£148,595
In real terms today£67,297 buys £100k future
Frequently Asked Questions
Inflation is the rate at which the general level of prices rises over time. As prices rise, each pound buys fewer goods — this is called a fall in purchasing power. At 3% annual inflation, £1,000 today has the same buying power as only £744 in 10 years' time. The Bank of England targets 2% CPI inflation as the long-run UK target.
For most general purchasing-power calculations, use CPI (Consumer Prices Index) — the Bank of England's official target measure. For student loan interest (Plan 2/5) or rail fares, use RPI which is typically 0.5–1.5 percentage points higher. For long-run financial planning, 2%–3% is a reasonable CPI assumption, though actual rates will vary.
If your savings rate is below inflation, your money loses real purchasing power even as the nominal balance grows. For example: 2% savings rate with 5% inflation means you lose 3% real value per year. To beat inflation, consider ISAs invested in equities (which historically return 5–8% nominal), or at minimum choose a savings account with a rate above current inflation.
UK CPI has averaged around 2.5–3% over the long term since the 1990s. The period 2022–2023 saw a spike above 11% — the highest since the early 1990s — driven by energy price shocks and supply chain disruptions following the pandemic. By 2024–2025 it had returned toward the 2% Bank of England target. For long-run financial planning, 2%–3% is a reasonable assumption.
The Bank of England's primary tool is the base interest rate. Raising rates increases borrowing costs, which reduces consumer spending and business investment, thereby slowing price rises. The Monetary Policy Committee (MPC) meets eight times per year to set the base rate. Higher base rates also tend to increase savings account rates and mortgage rates throughout the economy.