In the UK, inflation is measured by looking at the prices of a list of good and services. The Office for National Statistics (ONS) then uses this list to work out the Consumer Price Index (CPI). The Bank of England monitors the CPI to understand inflation over time.
Why the rate of inflation is important
As the Bank of England explains on its website, it’s important for inflation to be stable and not too high. If it fluctuates too often, or goes up too much, it makes it difficult for businesses to set prices for things – like the cost of a new car for example. It also makes it hard for people to plan how to spend their money.
When inflation is too low – or even negative – people may stop or reduce their spending because they expect prices to continue dipping. And if people stop spending, companies could go out of business and people could lose their jobs.
Where does interest come in?
Interest is the percentage charged on the total amount you borrow or earned on the total amount you save. Accounts that offer a service to save or borrow money will probably have an interest rate.
On your savings accounts, most banks will pay interest to you for saving your money with them. If you’ve got a loan from the bank, you (the borrower) will most likely be charged interest on the money you borrow.
If the interest rate increases on your savings account, you will earn more. But if it increases on money you’ve borrowed, you will pay more.
How changes to the Bank of England base rate affect interest and inflation