Inflation Calculator
UK

Inflation is the gradual increase in the general price level of goods and services. When prices rise, each pound in your pocket buys less than it did before. At 2.5% annual inflation, something that costs £100 today will cost £128 in 10 years and £164 in 20 years. If your money is not growing at least as fast as inflation, you are getting poorer in real terms even though your bank balance stays the same.

This is the hidden danger of holding large amounts of cash. A savings account with £50,000 earning 1-2% interest while inflation runs at 3% is losing roughly £500-£1,000 per year in real purchasing power. Over a decade, that £50,000 might still show as £55,000 in your account, but it would buy only what £43,000 could have bought when you started. Inflation is a tax on cash.

The effect compounds over time — just like investment returns, but working against you. At 3% annual inflation over 30 years, £100,000 in today's money would need to be £242,700 just to have the same purchasing power. This is why long-term financial planning must always account for inflation.

The Bank of England has a mandated target of 2% CPI inflation. This is considered the "Goldilocks" rate — low enough that prices remain broadly stable, but high enough to avoid deflation (falling prices, which can be economically destructive). When inflation rises above target, the Bank raises interest rates to cool the economy. When it falls below, rates are cut to stimulate spending.

For long-term financial planning, assuming 2-3% annual inflation is reasonable. This is broadly consistent with the Bank's target and the long-term historical average. However, as 2022-2023 demonstrated, inflation can spike dramatically in response to external shocks. Building an investment portfolio that grows well above inflation provides a safety margin against these unpredictable spikes.

The UK has two main inflation measures, and they can give noticeably different readings:

CPI (Consumer Prices Index) is the official government measure. It tracks the price of a basket of around 700 goods and services but excludes mortgage interest payments and some housing costs. It uses a geometric mean calculation that tends to produce lower readings. The Bank of England targets CPI at 2%.

RPI (Retail Prices Index) includes mortgage interest payments and council tax, making it a broader measure of living costs. It uses an arithmetic mean, which typically produces readings 0.5-1% higher than CPI. RPI is used for student loan interest calculations (Plan 2: RPI + up to 3%), rail fare increases, and some index-linked gilts and bonds.

The ONS no longer considers RPI to be a reliable statistical measure, and it will be reformed to match CPIH (CPI including owner occupiers' housing costs) from 2030. For personal financial planning, CPI is the more commonly used benchmark, but if your costs include a mortgage or rent, actual inflation in your life may be closer to RPI.

The fundamental problem with cash savings is that interest rates rarely exceed inflation by much, and after tax, they often fail to keep pace at all. A basic-rate taxpayer earning 4.5% interest on cash loses 20% to tax, netting 3.6%. If inflation is 3%, the real return is just 0.6% — barely treading water.

Investing in equities offers a fundamentally different proposition. Global stock markets have historically returned 7-10% per year nominal over long periods. Even after inflation and ISA-sheltered from tax, real returns of 4-7% per year are achievable. This means your money is genuinely growing in purchasing power, not just keeping up.

The comparison over 20 years is stark. £500/month in cash savings at a real return of 0.5% (after tax and inflation) grows to roughly £126,000 in purchasing power. The same £500/month invested at a 5% real return grows to approximately £206,000 — over £80,000 more in real wealth. The longer the time horizon, the wider the gap becomes.

When an investment platform shows you a headline return of 8%, that is the nominal return — it does not account for inflation. If inflation was 3% that year, your real return was only 5%. The 3% was not really growth — it was just your money keeping up with rising prices.

This distinction matters enormously for long-term planning. If you project your portfolio growing at 8% for 30 years, you might expect over £1 million from a modest monthly investment. But in today's purchasing power (after adjusting for 2.5% inflation), that £1 million is worth roughly £590,000. Still excellent — but very different from the headline number.

Our compound interest calculator with inflation adjustment shows both nominal and real (inflation-adjusted) projections side by side. Always look at the real figure when making financial plans — it tells you what your future portfolio will actually buy in terms of today's goods and services.