Why should I care about inflation?

What is inflation?

Inflation is the measure of the cost of living, and includes things such as your food, energy bills, travel and clothes.

It has been going up in recent months and surged to 3.8% in July 2025. This is a big leap from 2.5% last year, and the highest level it's been since January 2024.

The latest increase was predominantly driven by rising food prices, transport fares, and fuel costs.

Reassuringly, the Government has set a 2% target but the Treasury warns that the road to achieving the Bank of England's 2% target will be "bumpy".

How does inflation affect me?

Rising inflation means households get hit by higher prices. It means that life gets more expensive.

While having to pay more for things such as the grocery shop, gas, electricity and petrol can put pressure on budgets at any time, you may feel the squeeze on your finances even more acutely right now, at what is an already challenging time.

Where do interest rates fit in?

One way to manage inflation is by raising interest rates. For now, the base rate for the Bank Rate sits at 4%.

The interest rate has been slowly coming down over the last year and Bank of England states that if pressures continue to ease this may be reduced further over time.

Is inflation good or bad?

If you’re a saver, rising inflation is bad news as it erodes the spending power of your hard-earned cash.

High interest rates also make things difficult for borrowers. Mortgage rates are the highest they have been over the last decade, making it more difficult to get on the property ladder, or to move up to the next rung.

And, if you are on a variable-rate mortgage, it's especially important to keep an eye on inflation as when interest rates rise, you could see your monthly mortgage payments go up.

How to beat inflation:

Seek out the best rates on your savings

As inflation can eat away at your savings, it’s important to shop around for the best rates you can find.

If you’re happy about locking your money away, the best rates are likely to be available on fixed-rate bonds. The top-paying accounts require you to tie your money up for five years, but you need to think carefully if you are comfortable fixing for this long

If you want to avoid your money being eroded by inflation, you might want to think about giving up the uncertainty of cash deposits in favour of the ups and downs of investing. But investment isn’t without its own risks, so you need to research carefully before considering it. You also need to be in it for the long term – with a horizon of at least five years – to ride out the highs and lows

Another easy way to boost your bank balance is by looking out for banks offering a cash incentive to switch your current account. 

Save on your supermarket shop:

• Try the ‘down-shift’ challenge. This means shopping for own-brand products. Also try shopping at budget superstores

• Make the most of loyalty schemes such as Tesco Clubcard and Sainsbury’s Nectar card to help you make savings

• Use a cashback credit card to earn as you shop. For example, the American Express Platinum Cashback Everyday card pays 5% on your spending for the first three months

• Take advantage of cashback sites, such as Topcashback and Quidco, when shopping online to get money back as you spend

Save on your household bills

While our advice is still not to shop around for your energy tariff right now in the midst of the ongoing energy crisis, it is still possible to shop around and make savings on other outgoings, such as your broadband and phone

You can also make big savings by shopping around on your insurance, so make a note of when each of your policies is up for renewal. Compare deals to make savings on the likes of car insurance, holiday cover, home and pet insurance

Make some easy savings by cancelling any subscriptions you no longer need or use, including those you set up during lockdown. Go through your bank statement and look for things such as online gym classes or streaming services. Also stop paying for insurance for items you no longer own