Why is UK inflation still rising?

The latest inflation figures shared by the Bank of England revealed that UK prices rose by 3.8% in the year up to August 2025. ¹ 

Despite the government setting an inflation target of 2% and making multiple adjustments to the Bank of England base rate, inflation remains above target. However, the rate is considerably lower than the 11.1% rate recorded in October 2022. ¹  

This was the highest inflation rate in 40 years, reflecting the impact of the Covid pandemic when oil and gas were in higher demand. Another reason for the significant surge in inflation in 2022 was the Russian invasion of Ukraine.

While inflation rates gradually decreased between October 2022 and August 2024, when the BoE target was reached for a short time, over the last year, inflation has been increasing again.

What is inflation and how is it calculated? 

Inflation measures how much the price of an item increases over time. For example, groceries are measured to see how much prices have changed over 12 months. If a loaf of bread cost £1 a year ago but now costs £1.10, then inflation is 10%.

Food and fuel are measured for price changes, and this is known as the Consumer Prices Index (CPI) provided by the Office for National Statistics, which is updated every month.

Why are prices still increasing?

Higher food prices are a major contributor to the increasing inflation rate. The government introduced increases to minimum wage and National Insurance contributions, which supermarkets have passed on to shoppers through price increases.

Interest rates directly affect inflation rates, as higher interest rates mean consumers have less money to spend. As a result, demand for goods decreases, and price rises tend to slow. 

The Bank of England base rate reached a high of 5.25% when inflation was at the 40-year high, as the government tried to balance the cost of borrowing against economic growth. 

When interest rates are higher, this impacts businesses, who are less likely to borrow money and may be forced to reduce the number of employees.

Recent Bank of England base rate cuts have helped to stabilise the jobs market, but this means inflation rates are still increasing, as shown by the 3.8% rate in the year up to August. 

What about wages?

One of the key concerns with inflation rates is whether wages are growing at the same rate. As long as wages increase at the same level of inflation, affordability stays the same, even when prices are increased.

The average annual growth in pay recorded between May and July 2025 was 4.8%¹, which was higher than inflation during the same period.

The Autumn Budget will be announced in November and is likely to include several tax changes. These could have an impact on disposable income for consumers, while higher taxes for businesses may lead to increased prices, so there are lots of factors that could affect inflation rates in the upcoming Budget.

Sources

1.    https://www.bbc.co.uk/news/articles/c17rgd8e9gjo

All the information in this article is correct as of the date of publishing. The opinions expressed in this publication are those of the authors Euxton Mortgage Market. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.
 
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October 2025