Prices in the UK rose 2.2% in the 12 months to August, the same rate as in the year to July.

The Bank of England has a target to keep inflation at 2%.

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%.

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 vinyl records and air fryers added in 2024, and hand sanitiser removed.

The ONS monitors price changes over the previous 12 months to calculate inflation.

The main inflation measure is called the Consumer Prices Index (CPI), external.

The latest figures show that CPI rose by 2.2% in the year to August, with higher air fares offset by lower fuel prices, and prices in hotels and restaurants rising more slowly.

Inflation has fallen significantly since it hit 11.1% in October 2022, which was the highest rate for 40 years.

However, that doesn’t mean prices are falling – just that they are rising less quickly.

Inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic, and energy prices surged again when Russia invaded Ukraine.

It then remained above the Bank of England’s 2% target partly because of high food prices.

Although these have now dropped back, some parts of the economy, like the services sector – which includes everything from restaurants to hairdressers – are still seeing more significant price rises.

The Bank of England uses interest rates to try and keep inflation at 2%.

When inflation was well above that target, it increased interest rates to 5.25%, a 16-year high.

The idea is that if you make borrowing more expensive, people have less money to spend. People may also be encouraged to save more.

In turn, this reduces demand for goods and slows price rises.

But it is a balancing act – increasing borrowing costs 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.

In August, the Bank of England cut rates to 5%.

However, Bank of England Governor Andrew Bailey warned: “We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much.”

Although the headline CPI figure is still to the 2% target, the Bank also considers other measures of inflation, external, such as “core inflation”, when deciding how to change rates.

Core inflation doesn’t include food or energy prices because they tend to be very volatile. Core inflation is often watched as a better indication for longer term trends. It was 3.6% in the year to August, up from 3.3%.

In its latest forecast for the global economy, the International Monetary Fund (IMF) warned that persistent inflation in countries including the UK and US might mean interest rates have to stay “higher for even longer”.

The latest quarterly official figures, external show that wages have been increasing more quickly than prices for the past year.

Average growth in pay (excluding bonuses) during the three-month period between April and June 2024 was 5.4%.

Many other countries have also seen inflation and higher interest rates in recent years.

At 2.2%, UK inflation is now the same as the rate for countries using the euro, which was 2.2% in August, down from 2.6% in July.

In June, the European Central Bank (ECB) cut its main interest rate from an all-time high of 4% to 3.75%, the first drop in five years.

US inflation fell to 2.5% in August, down from 2.9% in July, and the lowest rate since March 2021.

But despite the drop, the US central bank has kept its key interest rates at between 5.25% and 5.5% since July 2023.

In August, Jerome Powell, who chairs the Federal Reserve, said “the time has come” for officials to cut interest rates – but he offered few clues as to how quickly or far they might fall.