The Desk
TL;DR
UK CPI inflation fell to approximately 2.6 percent in early 2026, according to ONS data, moving closer to the Bank of England's 2 percent target. Energy price cap changes, food price movements and services inflation are the primary components driving the current rate. Real wages - earnings above CPI - turned positive in mid-2023 and have remained positive through 2025-26, representing a gradual recovery in household purchasing power after the 2022-23 cost of living crisis.
Key facts (2026)
- ONS publishes the monthly CPI figure approximately 17 days after the end of the reference month; the Bank of England's inflation target is 2 percent CPI over the medium term (Bank of England remit, 2025).
- Core CPI - which excludes energy, food, alcohol and tobacco - provides a better indicator of underlying inflationary pressure and is closely watched by the MPC when setting rates (Bank of England Monetary Policy Report, 2025).
- The energy price cap, reset quarterly by Ofgem, is one of the most significant drivers of headline CPI in the UK; cap increases or decreases mechanically lift or reduce the CPI energy component (Ofgem quarterly cap data, 2026).
- Real wage growth - defined as annual Average Weekly Earnings growth above CPI inflation - turned positive in mid-2023 and has continued positive into 2025/26, though cumulative purchasing power losses from 2021-23 have not been fully recovered (ONS AWE release, 2025/26).
- The Personal Savings Allowance of £1,000 for basic-rate taxpayers means that most savers with typical balances can earn interest without income tax liability even at elevated rates; the real return on cash savings depends on the gap between the savings rate and the CPI inflation rate (HMRC PSA rules, 2025/26).
What is driving UK inflation in 2026
UK headline CPI inflation declined from its peak of 11.1 percent in October 2022 to approximately 2.6 percent in early 2026. The primary drivers of the disinflation were: falling energy prices following the reduction in global gas prices from their 2022 peaks, reflected in lower quarterly Ofgem energy price cap levels; easing food price inflation, which had run above 15 percent at its peak in 2023 and has since moderated substantially; and the lagged impact of Bank of England base rate increases, which reduced consumer demand and brought goods price inflation close to zero. Services inflation - covering items such as restaurant meals, hairdressing, holidays and insurance - has been the most persistent component, remaining above 5 percent for much of 2024 and 2025 before moderating in 2026. Services inflation is closely linked to wage growth because services are labour-intensive; as nominal wage growth decelerates, services inflation typically follows with a lag.
CPI versus CPIH: the housing cost difference
CPI measures the price of a basket of goods and services but excludes the cost of owner-occupier housing. CPIH adds an estimate of this cost using a rental equivalence approach - essentially asking what rent an owner-occupier would pay for their own home. The ONS considers CPIH its preferred headline measure because it provides a more complete picture of the cost of living for the full population. In practice, CPI and CPIH typically move closely together; the divergence is most pronounced when house prices and rents move significantly relative to the general price level. For most practical purposes - setting wage demands, comparing savings rates, or assessing the real cost of inflation - CPI is the more widely cited and easier to find figure.
How inflation affects savings rates and purchasing power
The real return on savings is the nominal interest rate minus the inflation rate. At a savings rate of 4.5 percent and CPI inflation of 2.6 percent, the real return is approximately 1.9 percent. This is positive - your purchasing power increases in real terms. By contrast, during 2022 and early 2023, when CPI exceeded 10 percent and savings rates were below 2 percent, real returns were deeply negative and savings were being eroded in purchasing power terms at a rate of 8 percent or more per year. The recovery in real returns since 2023 has been one of the significant improvements in the savings environment for UK households. For long-term savings goals, inflation is the primary erosion risk; for this reason, holding substantial cash in accounts earning below inflation for extended periods can compromise financial security even if the nominal balance grows.
Real wages: the earnings-inflation relationship in 2025-26
Real wage growth measures whether earnings are rising faster than prices. The ONS Average Weekly Earnings (AWE) series tracks nominal earnings growth across private and public sector employees. During the 2022-23 inflation peak, nominal wage growth lagged inflation significantly, producing the worst squeeze in real incomes for decades. From mid-2023, as inflation fell faster than wage growth decelerated, real wage growth turned positive. By early 2026, ONS data shows nominal AWE growth of approximately 5 percent year on year against CPI of approximately 2.6 percent, implying positive real wage growth of around 2.4 percentage points. However, the cumulative loss of purchasing power from the 2021-23 period - often cited as the sharpest cost of living crisis since the 1970s - has not been fully recovered; real wages in early 2026 remain somewhat below their pre-pandemic trend path.
How the MPC responds to inflation above target
When CPI inflation exceeds the 2 percent target, the MPC can raise the base rate to reduce demand and bring inflation back toward target. Higher rates increase mortgage costs (for tracker and variable rate holders), raise business borrowing costs, and make saving more attractive relative to spending - all of which reduce economic demand and put downward pressure on prices. The MPC's decision involves balancing the inflation target against the impact on employment and growth; raising rates aggressively risks triggering a recession, while not raising them enough allows inflation expectations to become embedded. The Bank of England publishes a detailed explanation of how it uses the base rate to meet the inflation target, including the transmission mechanism through which monetary policy affects the real economy, in its Monetary Policy Framework documentation.
Inflation and pension planning
Inflation is one of the most significant long-term risks in retirement planning. A fixed nominal income in retirement - from a defined benefit scheme or an annuity without inflation linking - loses purchasing power in real terms every year at the prevailing inflation rate. At 2.6 percent inflation, a fixed income of £20,000 per year loses approximately 22 percent of its real value over 10 years and nearly 40 percent over 20 years. For this reason, inflation-linked income sources - such as the state pension (which increases by the triple lock), inflation-linked annuities, or defined benefit pensions with CPI indexation capped at 5 percent - are particularly valuable for covering essential expenditure in retirement. The real return on the drawdown portfolio also depends critically on the inflation environment; periods of high inflation require higher nominal returns to maintain the same real standard of living.
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Frequently asked questions
Why does the Bank of England target 2 percent inflation rather than 0 percent?
A small positive inflation rate provides several economic benefits: it gives the MPC room to cut real interest rates when the economy needs stimulus (which is not possible if nominal rates are already at zero and inflation is also zero); it provides a buffer against deflation, which can be more harmful than low positive inflation because falling prices encourage consumers to delay purchases; and it facilitates the adjustment of relative prices across the economy without requiring nominal price cuts in every sector.
How is my personal inflation rate different from CPI?
CPI is an average across the consumption pattern of a representative UK household. Your personal inflation rate depends on how your actual spending compares to the basket. If you spend a higher than average share of income on energy or food (typically true of lower-income households), your personal inflation rate was higher than CPI during the 2022-23 energy and food price surge. If you spend a lower share on those categories and more on travel and restaurants, your experience may have been different. ONS provides a personal inflation calculator on its website that allows you to adjust the basket weights to reflect your own spending.
What is the triple lock and how does it protect the state pension from inflation?
The triple lock guarantees that the state pension rises each April by the highest of: CPI inflation for the prior September, average earnings growth, or 2.5 percent. This means the state pension cannot rise by less than 2.5 percent even in a low-inflation, low-wage-growth environment, and rises by at least the inflation rate when CPI is above 2.5 percent. The triple lock has protected state pension recipients' real incomes significantly since its introduction in 2011. Its continuation beyond 2026 is subject to political review; the government has committed to the triple lock for the current parliament.
How quickly does a base rate change affect inflation?
The Bank of England estimates the full effect of a base rate change on inflation takes approximately 18 to 24 months to work through the economy. The impact on tracker mortgage rates is immediate; the effect on consumer spending and business investment takes longer as higher borrowing costs accumulate and discourage expenditure. This lag is why the MPC has to be forward-looking, raising rates before inflation peaks and cutting them before the economy risks contraction.
Are wage increases inflationary?
Higher wages increase household spending power, which can contribute to demand-pull inflation. They also increase costs for employers, particularly in services sectors, which may be passed on through higher prices - cost-push inflation. The MPC monitors wage growth closely because sustained wage growth above productivity growth tends to feed through into services inflation. However, moderate real wage growth is not inherently problematic if it reflects productivity improvements rather than a wage-price spiral.
How we verified this guide
CPI and CPIH data references were verified against ONS consumer price inflation publications. Bank of England inflation target and MPC remit were confirmed from the Bank's published framework documents. Triple lock description was verified from DWP's published state pension uprating policy. AWE data references were cross-referenced with ONS Average Weekly Earnings releases.
Primary sources
- ONS - Inflation and price indices
- Bank of England - Inflation and the inflation target
- ONS - Average Weekly Earnings statistics
- MoneyHelper - Protecting against inflation
- Citizens Advice - Energy costs and help
Last reviewed: May 2026.
