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Inflation Rate Calculator
Calculate the annualised inflation rate between any two price points.
How to Calculate the Rate of Inflation
The Annualisation Formula
Rate = (P2/P1)^(1/years) - 1
Example: (130/100)^(1/5) - 1 = 5.39%
This formula converts a total price change into an equivalent annual compound rate. It accounts for the compounding effect — a 30% total increase over 5 years is not 6% per year, it is 5.39% per year compounded.
Worked Example
A basket of goods cost £100 in 2020 and £130 in 2025. Total increase = 30%. Annualised rate = (130/100)^(1/5) - 1 = 5.39% per year. This means prices increased by an average of 5.39% annually, compounded. This is higher than the 2% target, indicating above-average inflation during this period.
UK Inflation: Historical Context
Recent Trends
UK CPI peaked at 11.1% in October 2022 following the energy crisis and post-pandemic supply disruptions. It has since returned closer to the 2% target through monetary tightening (higher interest rates). Energy prices, food costs, and wage growth were the main drivers of the 2021-2023 spike.
Long-Term Average
The long-term average UK inflation rate is approximately 2-3% annually. The Bank of England targets 2% CPI inflation. Over 30 years at 2.5% inflation, prices roughly double — what costs £100 today would cost ~£210. This makes inflation a critical factor in long-term financial planning.
How to Use This Inflation Rate Calculator
Enter Year 1 Price
The price or index value at the start.
Enter Year 2 Price
The price or index value at the end.
See Results
Annualised rate, total increase, and purchasing power.
Why Inflation Rate Matters for Your Finances
- Real vs nominal returns. Your investment return minus inflation gives the real return — the actual increase in purchasing power. A 7% return with 3% inflation is only 3.88% real growth.
- Wage growth comparison. If your salary rises 3% but inflation is 5%, you have taken a real-terms pay cut of about 2%. Compare wage growth to inflation to understand your true income trajectory.
- Savings erosion. Cash savings earning below the inflation rate lose purchasing power every year. At 5% inflation and 2% savings rate, your real return is negative 3%.
- Retirement planning. A 2.5% inflation rate halves purchasing power in ~28 years. Retirement plans must account for decades of inflation to maintain living standards.
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