Inflation describes how quickly a price level rises. Lower positive inflation means that prices rise more slowly; it does not mean the price level has returned to where it started. A falling price level is deflation.
Follow one shopping basket
Imagine a basket costing £100. After 10% inflation it costs £110. If inflation then falls to 2%, the next price is £112.20, not £102. Inflation slowed, but the basket became more expensive again. These are illustrative figures.
The headline index represents a basket across households. Your own experience depends on what you buy. A household spending heavily on energy or rent can feel a different change from the average.
If your savings grow more slowly than prices, their purchasing power falls even if the account balance rises. Compare the amount of money with what it could buy.
Try explaining it
A pay rise of 4% arrives while the relevant price level rises 5%. Has purchasing power improved?
Reveal the worked answer
No. The illustrative real change is 1.04 / 1.05 − 1, approximately −0.95%. Subtracting 5% from 4% gives a useful approximation, but the ratio is exact.
Read the number carefully
Ask which index, which country and which period the headline uses. A monthly change and a year-on-year change answer different questions. A lower annual rate can also reflect a high comparison point a year earlier.
Check your understanding
A £100 basket rises 10%, then 2%. What cumulative price rise has occurred?
See the worked answer
12.2%. Multiply 1.10 by 1.02, then subtract one. Adding the two annual rates misses the compounding.
Your next step
Compare a 4% savings-growth assumption with 2% and 5% inflation in the free tool. Keep all other inputs fixed. Explain why nominal balances match but real balances differ.
Bank of England: What is inflation?. Reviewed 14 October 2026. Worked examples and exercises are original illustrations; no current market prices are used.