Daily Junction.mobi portalNews · October 3, 2025 · Marcus Vale · 5 min
CPI inflation peaked at 11.1% in October 2022 and the Bank of England has been cutting Bank Rate from its 5.25% peak since August 2024. Here is how the ONS actually builds the inflation number, and what the rate-cutting cycle means for your finances.
Few economic indicators shaped UK politics and household budgeting as directly as inflation did across 2022-25. A spike unlike anything most working-age adults had experienced pushed the cost of living to the top of every political agenda, and the subsequent multi-year effort to bring it back down — via the sharpest interest rate rising cycle in decades — has been felt in mortgage costs, wage negotiations and government borrowing costs ever since. Understanding how the headline number is actually built helps make sense of why it moves the way it does.
Every month, the Office for National Statistics collects around 180,000 individual prices from thousands of retailers, both physical and online, across a representative basket of several hundred goods and services designed to reflect typical UK household spending. The change in the total cost of that basket compared with a year earlier is the headline Consumer Prices Index (CPI) figure. The basket itself is reviewed and updated annually — items judged no longer representative of typical spending are dropped, and newer categories of spending are added, a quiet but genuine reflection of how consumption habits change year to year.
CPI inflation peaked at 11.1% in October 2022 — the highest rate recorded in more than 40 years — driven overwhelmingly by a spike in wholesale energy prices following Russia's full-scale invasion of Ukraine in February 2022, compounded by continuing post-pandemic global supply chain pressure and strong post-lockdown demand. The scale of that spike, and its concentration in energy and food — the categories households find hardest to reduce spending on — is a large part of why the 2022-23 cost of living crisis felt as severe as it did relative to the headline percentage figure alone.
"Inflation at 11% doesn't mean everything costs 11% more. It means the average basket does — but energy and food, which low-income households spend a disproportionate share of their budget on, rose considerably faster than the average, which is why the crisis hit poorer households hardest even though the headline number applied to everyone." — a distinction the ONS itself has repeatedly emphasised in its own commentary on distributional effects of the 2022 inflation spike.
The Retail Prices Index, an older measure than CPI, differs in both coverage and methodology. RPI includes housing costs such as mortgage interest payments, which CPI excludes; and RPI uses an arithmetic mean to combine price changes, while CPI uses a geometric mean — a technical difference that consistently produces a higher RPI figure than CPI for the same underlying price data. Despite being formally stripped of "national statistic" status by the UK Statistics Authority over its methodological flaws, RPI is still referenced for some annual rail fare increases and for index-linked UK government bonds (gilts), a persistent source of criticism from consumer groups including Which?, who argue rail passengers face fare rises calculated on a measure the government's own statisticians consider less accurate than CPI.
The Bank of England's Monetary Policy Committee raised Bank Rate repeatedly from near-zero in late 2021 to a peak of 5.25% in August 2023 — the sharpest tightening cycle in the Bank's modern independent history — and held it at that level for roughly a year while inflation gradually fell back from its 2022 peak. The Bank began cutting Bank Rate from August 2024, moving in measured steps rather than sharply, reflecting the MPC's stated caution about loosening policy too quickly while services inflation and wage growth remained elevated relative to the Bank's 2% target, set by HM Treasury and reviewed annually.
The rate-cutting cycle directly affects mortgage costs: households on tracker or new fixed-rate mortgages have seen gradually falling rates since the cuts began in August 2024, though anyone still on a fixed rate agreed during the 2021-23 period of ultra-low or peak rates will only feel the change when that fixed term ends and they remortgage — a dynamic the Bank of England itself has flagged as creating a multi-year lag in how quickly rate cuts feed through to household budgets. For anyone managing household spending against the cost of living pressures that built through the crisis, it is worth checking which specific inflation measure any contract or benefit you hold is linked to — CPI-linked pensions and benefits track differently from RPI-linked rail fares or older savings products, and the gap between the two measures compounds meaningfully over several years.
One further wrinkle worth understanding is how the ONS treats owner-occupier housing costs, a persistent source of public confusion. CPIH — a related measure the ONS also publishes alongside headline CPI — includes an estimate of owner-occupiers' housing costs using a rental-equivalence approach, while headline CPI excludes housing costs for owner-occupiers entirely. The two measures can diverge noticeably during periods of rapid house price or rental change, which is part of why economists and journalists sometimes cite CPIH rather than CPI specifically when discussing housing-driven cost pressures.
Watch the ONS's monthly CPI release for whether inflation settles durably at or near the Bank's 2% target, or continues to run above it in specific categories — services inflation in particular has proven stickier than goods inflation through the disinflation process, a pattern common across most economies recovering from the 2022 energy-driven spike. Also watch the pace of further Bank Rate cuts: how quickly the MPC moves depends heavily on whether wage growth, still a key input into services inflation, cools in line with the Bank's own forecasts. For the underlying dynamics of how prices, wages and demand interact more generally, see our explainer on what inflation actually is and why it matters.
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