What is the UK inflation rate and how does it affect me?

Prices in the UK rose by 3.2% in the year to March 2024 - the lowest rate since September 2021.

However, as this is above the Bank of England's 2% target, it decided not to cut interest rates - which are used to control inflation - in May.

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 "basket of goods" is regularly updated to reflect shopping trends, with vinyl records and air fryers added in 2024, and hand sanitiser removed.

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

The main inflation measure used is called the Consumer Prices Index (CPI), external.

One reason CPI fell to 3.2% in March was due to a drop in price for food items like meat, crumpets and chocolate biscuits.

The Bank of England also considers something called "core inflation" when making decisions about interest rates.

This excludes the price of energy, food, alcohol and tobacco - which can change often - to provide a comprehensive picture of price rises.

Core inflation was 4.7% in March.

Soaring food and energy bills were the main causes of the UK's recent high inflation.

Oil and gas were in greater demand after the Covid pandemic, and prices surged again when Russia invaded Ukraine, cutting global supplies.

The conflict also reduced the amount of grain for sale, pushing up food prices.

Inflation hit 11.1% in October 2022, the highest rate for 40 years.

The rate has fallen significantly since then but that doesn't mean prices are falling - just that they are rising less quickly.

One reason that inflation has remained high is that worker shortages have made it more expensive to find and keep staff, external.

The Bank of England target is to keep inflation at 2%.

With inflation well above that level, the Bank of England increased interest rates to 5.25%.

The theory is that if you make borrowing more expensive, people have less money to spend. They may also choose 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 May, the Bank of England held rates at 5.25% for a sixth time.

Governor Andrew Bailey said the BoE needed to "see more evidence" that price rises had slowed but that he was "optimistic that things are moving in the right direction".

He said the BoE expected inflation to fall "close" to its 2% target in the next couple of months.

Wage growth is growing faster than rising prices, official figures show, but pay is not increasing as quickly as it was.

Pay, excluding bonuses, grew by 6% in the first three months of 2024, compared with the same period a year before.

After taking inflation into account, it means pay went up by 1.9%.

Many other countries have also seen inflation and higher interest rates.

But even at 3.2%, UK inflation remains higher than in the EU.

The annual inflation rate for countries using the euro was 2.4% in April, the same as in March.

The European Central Bank raised its key interest rate to a record high 4% in September and has left it there.

In the US, inflation hit 3.5% in March and the US central bank kept its key interest rate at between 5.25% and 5.5%. .