What is happening to UK prices?

What is happening to UK prices?Image source, Getty ImagesPublished14 January 2011Updated Just nowInflation in the UK was 2.6% in the year to June, lower than the previous month's figure, but still above the Bank of England's 2% target.The fall was slightly more than economists predicted, after the ceasefire in the Middle East – which has since broken down – temporarily caused a drop in petrol and diesel prices.But inflation is widely expected to rise again in the coming months. What is inflation? 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%.How is the UK's inflation rate measured and what does it mean for UK interest rates?The prices of hundreds of everyday items, including food and fuel, are tracked by the Office for National Statistics (ONS).This virtual "basket of goods" is regularly updated to reflect shopping trends, with alcohol-free beer, dashboard cameras, and pet grooming equipment among items added in 2026, while premium bottled lager and sheets of wrapping paper were removed. The ONS uses price changes in the basket of goods over the previous 12 months to calculate inflation.The main inflation measure is called the Consumer Prices Index (CPI), external, and the latest figure is published every month. The Bank of England looks closely at the inflation figures when deciding whether to increase, lower or hold its base interest rate, which is currently 3.75%.Putting rates up makes borrowing more expensive, giving people and businesses less money to spend, reducing demand for goods and slowing price rises.But it is a careful balancing act – increasing borrowing costs also 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.What is happening...