What?
The Bank of England was founded in 1694 to act as banker to the UK Government. Today, its responsibilities are broader, and one of the most important for everyday life is setting the UK’s base interest rate through the Monetary Policy Committee (MPC). This rate influences borrowing costs (including mortgages), as well as savings returns.
Each month, the Office for National Statistics (ONS) collects around 180,000 prices across roughly 700 items. These form a “shopping basket” used to calculate the Consumer Prices Index (CPI), the UK’s main measure of inflation.
CPI has been the Bank of England’s official inflation target since 2003, set at 2%. The target has an acceptable range of 1% to 3%. If inflation moves more than 1 percentage point away from the target, the Bank must write an open letter to the UK Government explaining why.
The Bank’s main tool for controlling inflation is the base interest rate. Higher rates generally reduce spending and borrowing, while lower rates encourage economic activity. The Bank also uses forward guidance and communication to influence expectations about future rates and demand.
Inflation matters because:
- Too high: prices rise quickly, making budgeting difficult for households and businesses
- Too low or negative: people may delay spending in expectation of lower prices in the future, reducing demand and economic activity
Facts
Using ONS CPI data from January 2004 (after the CPI target was introduced) to March 2026 (the latest available figures) gives a period of 267 months, or just over 22 years.
Over this period:
- CPI was above 3% for 78 months
- CPI was below 1% for 30 months
This means inflation was outside the 1% to 3% target range for just over 40% of the time, with most breaches occurring on the upside (inflation above 3%).
Looking at the last 5 years (60 months total):
- CPI was above 3% for 52 months
- CPI was within the 1% to 3% target range for 8 months
Inflation has therefore been outside the target range for the vast majority of this period, driven mainly by sustained higher inflation. For over 86% of the time, inflation was above the desired range.
Higher inflation reduces real household incomes and increases the cost of living, directly affecting day-to-day financial stability.
Why It Matters
Inflation has remained persistently above the Bank of England’s target over the past five years, reducing purchasing power and increasing financial pressure on households.
Interest rates are the Bank’s primary tool for controlling inflation. However, inflation has remained outside the target range for a prolonged period, suggesting that interest rates alone have not been sufficient to maintain price stability during recent economic conditions.
In effect, inflation has remained above target despite sustained use of the Bank’s main policy tool.
Myth Buster
It is often assumed that the Bank of England can directly control inflation. In reality, monetary policy influences inflation over time, but interest rates are a blunt tool that cannot precisely control outcomes in a complex global economy.
External factors such as energy prices, supply chain disruption, and geopolitical events also play a significant role.
Given this, inflation performance reflects both policy choices and external conditions. However, the sustained deviation from target in recent years raises legitimate questions about the effectiveness of the current framework in practice.
Source
As always, sources matter. Here are the relevant ones: