Inflation is a measure of how the prices of goods and services are rising, which can affect people’s household finances.
Each month, we publish the latest annual inflation rate. This compares the prices of products with those purchased in the same month a year earlier. We also explain how prices affect the cost of living and different types of households.
Some goods contribute more to the overall inflation rate than others. For example, if there are large price increases for some products in a spending category, while others stay stable, then inflation would be influenced by the changing prices in that spending category.
So, how the headline inflation rate affects your household depends on which products you tend to spend your money on.
It is important to note that if the inflation rate falls it does not necessarily mean that prices are falling. For example, a fall in the rate of inflation may be because prices of goods and services are increasing at a slower rate than they were.
How do we calculate inflation?
The rates of inflation we produce are well-established statistics that measure the average change in the prices of all goods and services. Consumer prices are measured by comparing the cost of goods and services in the current month with the same month a year earlier.
To measure this average change, we use our most comprehensive measure of consumer prices inflation, which is the Consumer Prices Index including owner occupiers' housing costs (CPIH). The difference between CPIH and the Consumer Prices Index (CPI) is that CPIH includes the costs of owning, maintaining, and living in your own home, such as repairs and home improvements.
The main aim of consumer price indices is to accurately measure how much the prices that we pay in the UK are changing overall. It is a large and complex process that is always changing.
How do we select what goes into our virtual shopping basket?
Using an internationally agreed framework, we carefully collect the in-store and online prices for over 700 items. These are representative of the goods and services that consumers typically spend their money on. Prices of these items are collected physically in 141 locations by around 300 people across the country.
Each month we ensure items are either identical or comparable with those collected in the previous month. Items include everything from milk, tea and bread to pineapples, mouthwash and socks. We also include larger purchases that may not be in your weekly shop, from a TV or a bed, to a new car, renting your home, or taking a flight. And we include services like using an electrician or having a haircut.
We keep a close eye on this “virtual shopping basket” to make sure it still reflects the kinds of things people regularly buy. Every year we update it based on what market research tells us, including which items people are spending their money on. We remove items that are becoming less popular, and add new products and services. For example, in recent years we have removed CD players, and added streaming services and smart speakers.
We also use this information in our calculator that shows how inflation is affecting your household costs.
We are working on plans to use shops’ checkout data to find out how many of each product they have sold.