Why UK Inflation Is Still Stuck Above 3% — and What It Means for Your Wallet
Despite a year of interest rate rises, UK inflation refuses to fall back to the Bank of England’s 2% target. Here’s why prices are staying high — and how you can protect your household budget.
The State of Inflation in 2025
Inflation has cooled from its double-digit peak in 2022, but the fight is far from over. According to the Office for National Statistics (ONS), the Consumer Prices Index (CPI) rose by 3.4% in the 12 months to May 2025, only slightly down from April’s 3.5%. The broader CPIH measure, which includes owner-occupiers housing costs, increased by 4.0% — still double the Bank of England’s target.
Source: ONS – Consumer Price Inflation, May 2025
| Sector | Annual Change |
|---|---|
| Food and non-alcoholic beverages | +4.4% |
| Housing and household services | +6.9% |
| Transport | +3.3% |
| Recreation and culture | +4.7% |
| Clothing and footwear | +2.1% |
Even as energy prices ease, everyday essentials remain more expensive than before the pandemic.
Why Inflation Is Still Sticky
Economists describe the UK’s situation as sticky inflation — when prices keep rising despite slower economic growth.
1. Services costs are driving it
The UK is a service-heavy economy. Wages in healthcare, transport, and hospitality continue to rise, which pushes up service prices.
2. Energy and housing bills remain high
Gas and electricity costs have dropped from their 2022 peak but are still 30–40% higher than in 2019. Rents are rising across all regions, and many homeowners have remortgaged at higher rates, passing those costs into the market.
3. Regulated price increases
Government-linked costs such as council tax, water bills, and rail fares increased by an average of 5–6% in spring 2025.
4. Import and supply chain pressure
A weak pound and lingering post-Brexit logistics challenges keep import prices elevated, especially for food and household goods.
The Bank of England’s Balancing Act
The Bank of England (BoE) has kept its base interest rate at 4.75%, the highest level in 16 years. The Bank wants to bring inflation back to 2%, but cutting rates too early risks reigniting price growth.
“We’re on the right track, but inflation is proving stickier than expected.” — Andrew Bailey, Governor of the Bank of England (November 2025)
Economists at Capital Economics expect the first rate cuts by mid-2026, with inflation slowly returning to target by late 2027. Until then, borrowing will stay expensive — and that matters for anyone with credit cards, car loans, or variable mortgages.
What Persistent Inflation Means for You
1. Real income is shrinking
Average earnings in mid-2025 rose 2.9%, while inflation was 3.4%. That means real wages fell by about 0.5% — you’re earning more pounds, but those pounds buy less.
2. Savings lose purchasing power
Even if your savings account pays 3% interest, inflation at 3.4% means your real return is -0.4%.
3. Borrowing stays expensive
Higher rates mean bigger repayments. A £250,000 mortgage fixed at 5% costs about £375 per month more than it would have at 2%.
4. Everyday life costs more
Grocery bills are roughly 20% higher than in 2021. Even small luxuries like coffee, takeaways, and streaming subscriptions quietly reduce disposable income.
What You Can Do About It
- Adjust your budget to account for 3–4% higher prices.
- Review insurance, utilities, and broadband deals annually.
- Automate savings by transferring money to a savings account on payday.
- Consider additional income streams to offset higher living costs.
- Use MoneyChest tools to track inflation and spending changes.
The Math: Inflation Over Five Years
| Year | Inflation Rate | Equivalent £1,000 Value |
|---|---|---|
| 2024 | 3.4% | £967 |
| 2025 | 3.4% | £934 |
| 2026 | 3.0% | £906 |
| 2027 | 2.5% | £883 |
| 2028 | 2.0% | £865 |
£1,000 today will have the purchasing power of roughly £865 in 2028 if inflation averages 3%.
Global Comparison
| Country | Inflation (Oct 2025) | Central Bank Rate |
|---|---|---|
| USA | 3.1% | 4.75% |
| Eurozone | 2.9% | 4.50% |
| Japan | 2.7% | 0.10% |
| Canada | 3.2% | 4.75% |
Global wage growth and persistent energy costs are keeping inflation above target across major economies.
Expert Takeaways
“Inflation may fall gradually, but prices won’t go back down — they’ll just rise more slowly.” — Sarah Coles, Hargreaves Lansdown
“Households should think in real terms, not nominal — what matters is what your money buys, not the number on your payslip.” — Paul Dales, Capital Economics
Key Steps to Stay Ahead
- Build a 6-month emergency fund.
- Review recurring expenses quarterly.
- Focus on real (after-inflation) returns on savings.
- Track and monitor spending with MoneyChest.
Final Thoughts
Inflation isn’t the crisis it was in 2022, but it’s still quietly eroding household finances. By budgeting realistically, comparing costs, and tracking your spending, you can stay in control even in uncertain times.
Small, consistent adjustments now are more powerful than drastic cuts later.
References:
- ONS – Consumer Price Inflation, May 2025
- Bank of England – Monetary Policy Report, November 2025
- Capital Economics – UK Outlook 2025
- NimbleFins – Average UK Household Budget 2025
