What is the rate and why are prices still rising?

Prices in the UK rose by 3.8% in the year to August, matching the rate recorded in July.

It means inflation remains well above the Bank of England’s 2% target.

The Bank moves interest rates up and down to try to keep inflation at that level, and has cut interest rates five times since August 2024.

Inflation is the increase in the price of something over time.

For example, if a bottle of milk costs £1 but is £1.05 a year later, then annual milk inflation is 5%.

The prices of hundreds of everyday items, including food and fuel, are tracked by the Office for National Statistics (ONS).

This virtual “basket of goods” is regularly updated to reflect shopping trends, with virtual reality headsets and yoga mats added in 2025, and local newspaper adverts removed.

The ONS monitors price changes over the previous 12 months to calculate inflation.

The main inflation measure is called the Consumer Prices Index (CPI), and the latest figure is published every month.

CPI was 3.8% in the year to August 2025, the same as in the 12 months to July.

The July and August figure is the highest recorded since January 2024, when the rate was 4%.

However, inflation remains well below the 11.1% figure reached in October 2022, which was the highest rate for 40 years.

The Bank also considers other measures such as “core inflation” when deciding whether and how to change rates.

This doesn’t include food or energy prices because they tend to be very volatile, so can be a better indication of longer term trends.

Core CPI was 3.6% in the 12 months to August, down slightly from 3.8% recorded in the year to July.

Although inflation has fallen significantly since the October 2022 high, that doesn’t mean prices are falling – just that they are rising less quickly.

Inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic, and energy prices surged again when Russia invaded Ukraine.

It then remained well above the 2% target partly because of higher food prices.

These continue to be a significant factor in the current inflation figures.

Inflation for food and non-alcoholic beverages was 5.1% in the year to August, up from 4.9% in the year to July.

August’s rise was driven by higher prices for vegetables, milk, cheese, eggs and fish. Beef, butter, chocolate and coffee have also seen significant increases.

Food price inflation has risen for five months in a row as economists said supermarkets were passing on the cost of government increases in the minimum wage and National Insurance Contributions to shoppers through higher prices.

When inflation was well above its 2% target, the Bank of England increased interest rates to 5.25%, a 16-year high.

The idea is that if you make borrowing more expensive, people have less money to spend. People may also be encouraged to save more.

In turn, this reduces demand for goods and slows price rises.

But it is a balancing act – increasing borrowing costs risks harming the economy.

For example, homeowners face higher mortgage repayments, which can outweigh better savings deals.

Businesses also borrow less, making them less likely to create jobs. Some may cut staff and reduce investment.

In recent months, inflation has remained above the Bank’s target at the same time as the economy has remained relatively flat and the jobs market has softened.

Therefore, the Bank has chosen to cut rates, despite high inflation, in an attempt to encourage people to spend more and get businesses to invest and create jobs to boost the economy.

The Bank of England began cutting rates in August 2024, and has made five cuts which have brought the rate down to 4%.

Bank of England governor Andrew Bailey has repeatedly said that future cuts would be made gradually and carefully.

At the Bank’s September meeting it decided to keep rates unchanged at 4%.

The decision had been widely expected given that prices are still rising at a rate well above the Bank’s target.

Indeed, the Bank’s governor Andrew Bailey said the UK was “not out of the woods yet” when it came to inflation, so any future rate cuts “will need to be made gradually and carefully”.

In its most recent Monetary Policy Report in August, the Bank said it expected inflation to peak at 4% in September. That is twice the Bank’s target rate and above the 3.8% high it predicted in its previous report in May.

At one point a further interest rate cut had been expected at the Bank’s meeting in November, but economists are now less sure this will happen.

The Bank also has to consider the wider global economy. Mr Bailey has repeatedly warned about the unpredictable impact of US tariffs, and conflict in Israel and Iran has also created uncertainty.

Announcements in the Budget on 26 November could also influence the Bank’s decision.

Annual average regular earnings growth was 6% for the public sector and 4.6% for the private sector.

Meanwhile, separate ONS figures showed the estimated number of vacancies in the UK fell by 9,000 (1.3%) to 717,000 between July and September 2025.

Vacancy numbers have now dropped compared with the previous three months for more than three years.

The unemployment rate was 4.8% in the three months to August – up from 4.7% in the three months to July and the three months to June.

This the highest figure since June 2021, which will also factor into the Bank of England’s rate decisions.

The US and EU countries have also been trying to limit price increases.

The inflation rate for countries using the euro was 2.2% in September, up from 2% in August, according to EU data.

In June 2024, the European Central Bank (ECB) cut its main interest rate from an all-time high of 4% to 3.75%, the first fall in five years.

By June 2025, after several further cuts, its key rate stood at 2%, where it has remained.

Inflation in the US rose to 2.9% in August, up from 2.7% in July and above the US central bank’s 2% target.

In September, the US central bank, the Federal Reserve, said it was lowering the target for its key lending rate by 0.25 percentage points, which puts it in a range of 4% to 4.25%.

The move – the bank’s first rate cut since December 2024 – is expected to kick off a series of additional reductions in the months ahead, which should help bring down borrowing costs across the US.

The Fed said that fears about the weak job market outweighed concerns about above-target inflation.

It has repeatedly come under attack from US President Donald Trump for not cutting rates.