What is inflation and why does it matter for savings?

Inflation is the measure of the rate at which prices increase. It's based on the cost of a basket of goods and services, and is calculated and published each month.

A number index is used to measure inflation, which is then translated into a percentage. For example, if one month the figure is 100 and the next it's 105, the rate of inflation for that month would be 5%.

By looking at the changes in the price of a whole host of goods and services, economists work out whether the cost of living in general is going up or coming down.

In the UK there are two types of inflation index - Consumer Prices Index (CPI) and Retail Prices Index (RPI). Both use the same basket of goods and services, but RPI also includes housing costs and mortgage interest payments, so is usually higher.

You can find historical information on inflation rates on the Office for National Statistics website.

If the rate of inflation is lower than the savings rate you are getting, then the real value of your money will grow. However, if the rate of inflation is above the savings rate you are getting, then the real value of your money will fall. That’s why it is important to review the interest rate paid on your savings account regularly and keep an eye on the best savings rates available to you.