In 2022, UK households faced the worst cost of living crisis in a generation. Inflation hit 11.1% — the highest in 40 years — and prices soared for energy, food, and almost everything else. A weekly shop that cost £80 in 2020 cost £100 by 2023. Energy bills doubled. Mortgage payments jumped. Wages did not keep up, and millions of people struggled to make ends meet. The Bank of England responded by raising interest rates from 0.1% to 5.25%, the fastest increase in decades, to bring inflation under control. By mid-2024, inflation had fallen to 2.3%, but prices remain high, and the scars of the crisis linger. Here is everything you need to know about inflation — what it is, what causes it, and how the Bank of England fights it.
What Is Inflation?
Inflation is the rate at which prices rise over time. It is measured as a percentage increase in the average price of goods and services.
For example, if inflation is 5%, a basket of goods that cost £100 last year now costs £105.
How inflation is measured
In the UK, inflation is measured by the Consumer Price Index (CPI), which tracks the prices of a basket of 700+ goods and services that a typical household buys, including:
- Food and drink (bread, milk, meat, alcohol)
- Housing (rent, council tax, utilities)
- Transport (petrol, bus fares, car insurance)
- Clothing (clothes, shoes)
- Recreation (cinema tickets, holidays, gym memberships)
- Healthcare (prescriptions, dental care)
The Office for National Statistics (ONS) collects prices from thousands of shops, websites, and service providers every month, and calculates the average change. This is the CPI inflation rate.
The target
The Bank of England has a 2% inflation target, set by the government. This is considered the optimal rate — low enough to keep prices stable, but high enough to encourage spending and investment.
If inflation is too high (above 3%) or too low (below 1%), the Bank of England Governor must write a letter to the Chancellor explaining why and what the Bank will do about it.
What Causes Inflation?
Inflation happens when demand exceeds supply — when people want to buy more goods and services than are available, prices rise.
There are three main causes:
1. Demand-pull inflation
Demand-pull inflation happens when the economy is growing strongly and people have more money to spend. Businesses cannot keep up with demand, so they raise prices.
This is "good" inflation because it is driven by economic growth. It is what the Bank of England targets with its 2% goal.
2. Cost-push inflation
Cost-push inflation happens when the cost of producing goods rises (e.g., higher wages, energy costs, raw materials), and businesses pass these costs on to consumers by raising prices.
This is "bad" inflation because it is not driven by growth — it is driven by external shocks (like the 2022 energy crisis).
3. Monetary inflation
Monetary inflation happens when there is too much money in the economy. If the government prints money or the central bank keeps interest rates too low for too long, people have more money to spend, which drives up prices.
This is what happened after the 2008 financial crisis and the COVID-19 pandemic, when central banks pumped trillions into the economy to prevent recession.
The 2022 Inflation Crisis
UK inflation hit 11.1% in October 2022, the highest since 1981. The causes were:
1. Energy prices
The Russia-Ukraine war (started February 2022) caused a global energy crisis. Russia supplies 40% of Europe's gas, and the war disrupted supply, sending prices soaring.
UK gas and electricity prices doubled in 2022. The energy price cap (the maximum suppliers can charge) rose from £1,277 per year (October 2021) to £3,549 per year (October 2022).
Energy is a major input cost for businesses (transport, manufacturing, heating), so higher energy prices pushed up the cost of everything.
2. Food prices
Food prices rose 19% in 2022–2023, driven by:
- Higher energy costs (farming, transport, refrigeration)
- Supply chain disruption (COVID-19 lockdowns, Brexit, war in Ukraine)
- Bad weather (droughts, floods) affecting harvests
Staples like bread, milk, and eggs saw the biggest rises.
3. Post-pandemic supply chain disruption
COVID-19 lockdowns disrupted global supply chains. Factories closed, shipping costs soared, and shortages of goods (semiconductors, building materials, consumer goods) drove up prices.
When lockdowns ended, demand surged (people had saved money during lockdowns), but supply could not keep up.
4. Labour shortages
Brexit and COVID-19 caused labour shortages in key sectors (hospitality, transport, healthcare, agriculture). Businesses had to raise wages to attract workers, and they passed these costs on to consumers.
5. Loose monetary policy
After the 2008 financial crisis and COVID-19 pandemic, the Bank of England kept interest rates at 0.1% and pumped money into the economy through quantitative easing (QE) — buying government bonds to increase the money supply.
This kept the economy afloat during crises, but it also created too much money chasing too few goods, which drove up prices.
How the Bank of England Fights Inflation
The Bank of England's job is to keep inflation at 2%. When inflation is too high, the Bank raises interest rates to cool the economy.
How interest rates work
The Bank of England base rate is the interest rate the Bank charges to commercial banks. When the base rate rises, banks pass the cost on to consumers by raising interest rates on:
- Mortgages (monthly payments rise)
- Loans (car loans, personal loans become more expensive)
- Credit cards (interest charges rise)
At the same time, savings rates rise, making it more attractive to save rather than spend.
The effect on the economy
Higher interest rates reduce demand by:
- Reducing consumer spending (people have less money after paying higher mortgage and loan costs)
- Reducing business investment (borrowing is more expensive, so businesses invest less)
- Strengthening the pound (higher rates attract foreign investors, which pushes up the pound and makes imports cheaper)
This cools the economy, reduces demand for goods and services, and slows price rises.
The 2022–2024 rate rises
The Bank of England raised interest rates 14 times between December 2021 and August 2023, from 0.1% to 5.25% — the fastest increase in decades.
| Date | Base rate |
|---|---|
| December 2021 | 0.1% |
| December 2022 | 3.5% |
| August 2023 | 5.25% |
| June 2024 | 5.25% (held) |
The rate rises worked: inflation fell from 11.1% in October 2022 to 2.3% in June 2024.
But the rate rises also caused pain:
- Mortgage payments soared — the average mortgage payment rose from £800 per month (2021) to £1,200 per month (2024)
- Businesses struggled — higher borrowing costs forced some businesses to close
- Recession risk — the economy barely grew in 2023, and some feared a recession
The Impact on Households
High inflation erodes purchasing power — the amount of goods and services you can buy with your money.
Example
If you earned £30,000 in 2020 and got no pay rise, your real income in 2023 was:
- 2020: £30,000
- 2023: £30,000 (same nominal income)
- Real income (adjusted for inflation): £24,900 (a 17% real-terms pay cut)
This is because cumulative inflation over 2020–2023 was around 20%, meaning £100 in 2020 was worth only £83 in 2023.
Winners and losers
Losers:
- Savers — inflation erodes the value of savings. If you had £10,000 in a savings account earning 1% interest in 2022, you lost money in real terms (inflation was 11%).
- Fixed-income earners — people on pensions or benefits saw their income fall in real terms.
- Renters — rents rose 10–15% in 2022–2023, while wages did not keep up.
Winners:
- Borrowers — inflation erodes the real value of debt. If you borrowed £100,000 in 2020, you still owe £100,000 in 2024, but it is worth less in real terms.
- Homeowners — house prices rose (until 2023), and mortgage debt became cheaper in real terms.
Inflation Today
As of June 2024, UK inflation is 2.3% — close to the Bank of England's 2% target. The Bank has held interest rates at 5.25% and is expected to start cutting rates in late 2024 or early 2025.
But the cost of living crisis is not over:
- Prices remain high — inflation measures the rate of price increases, not the level of prices. Even if inflation is 2%, prices stay elevated.
- Wages have not caught up — real wages (adjusted for inflation) are still below 2019 levels for many workers.
- Mortgage pain continues — millions of homeowners are still adjusting to higher mortgage payments.
The Bottom Line
Inflation is the rate at which prices rise, measured by the Consumer Price Index (CPI) tracking a basket of 700+ goods and services. UK inflation hit 11.1% in October 2022 (highest since 1981), driven by energy prices, food costs, and post-pandemic supply chain disruption. The Bank of England targets 2% inflation and raises interest rates to cool the economy when inflation is too high, making borrowing more expensive. High inflation erodes purchasing power — £100 in 2020 was worth only £83 in 2023 due to 20%+ cumulative inflation over three years. Inflation has now fallen to 2.3% (June 2024) after the Bank raised interest rates from 0.1% to 5.25%, but the cost of living crisis continues. Prices will not fall back to 2019 levels — they will stay high, rising more slowly. The Bank of England's job is to keep inflation at 2%, balancing the risk of high inflation (eroding savings, reducing purchasing power) against the risk of recession (caused by raising rates too fast). Inflation is a fact of life, but when it spikes to 11%, it causes real pain for millions of households. The 2022 inflation crisis was a reminder that stable prices are not guaranteed, and that central banks must act decisively to keep inflation under control.