Politicians love to announce that inflation is “falling”. It is the sort of line that sounds like good news and lands like a tax rebate. Then you do your weekly shop, glance at your rent, open the energy bill, and wonder what on earth they are talking about.
Here is the catch they rarely explain. Inflation falling from 11 per cent to under 3 per cent, which is roughly the journey the UK has been on since 2022, does not mean anything got cheaper. It means prices that already leapt are now climbing more slowly. The cliff you fell off does not un-fall. Prices today sit roughly a quarter higher than they did five years ago, and they are staying there. A lower inflation rate just means the climb from that higher base has eased.
That gap between a falling rate and a still-painful price level is the first thing worth understanding. The second is why inflation is so stubborn to fix in the first place. The answer is that there is not one inflation. There are three, and the main tool we reach for only really suits one of them.
The three engines of inflation
Demand-pull is the one most people picture. Too much money chasing too few goods. When households and businesses want to spend more than the economy can produce, prices get bid up. A boom, cheap credit, a big stimulus cheque: all of it pushes demand past what the shops and factories can supply, and prices rise to ration what is there. This is the economy running hot.
Cost-push comes from the other direction. The cost of making and moving things goes up regardless of how keen anyone is to buy. An oil shock, a weaker pound that makes every import dearer, a failed harvest, a new tax on production: each raises the cost of supply, so businesses charge more to stand still. The nasty part is that cost-push tends to raise prices and weaken the economy at the same time, because dearer inputs mean less gets made. That uncomfortable mix of rising prices and stalling growth is what gives us the word stagflation.
Wage inflation, sometimes called built-in inflation, is the one that turns one shock into a lasting problem. Prices rise, so workers reasonably ask for more pay to keep up. Higher wages raise costs, so firms lift prices again, which justifies the next pay claim. Round it goes. Economists call this the wage-price spiral, and it is the thing central banks fear most, because it is what makes inflation persistent rather than a one-off jolt. Wages sit awkwardly between the other two categories: rising pay is a cost to an employer, yet it is also a response to prices that already rose. The danger is not any one pay rise. It is the loop.
What core inflation is actually for
Once you can see three engines, you can see why there is a measure called core inflation. Core strips out food, energy, alcohol and tobacco from the headline figure. That sounds like cheating, removing the very things people feel most, but there is a sound reason for it.
Food and energy prices are volatile and usually driven by global events rather than anything happening in the UK economy. They are noise. By taking them out, core inflation tries to show the underlying trend, the part that is becoming embedded in domestic wages and services prices. It is a way of telling a temporary cost shock apart from inflation that is settling in for the long haul. That is why the Bank of England watches core inflation, services inflation and wage growth far more closely than the headline: together they reveal whether a passing shock is quietly turning into a wage-price spiral. Think of core inflation as a lens rather than a headline, a way to spot which engine is running.
Why interest rates only fit one of the three
Now for the part that should bother you. The main lever we use against inflation is monetary policy: interest rates, set not by the government but by the independent Bank of England since 1997. And interest rates are fundamentally a tool for managing demand. Raise them, borrowing gets dearer, spending and investment cool, saving looks more attractive, the economy slows, and inflation eases.
Against demand-pull inflation, that is a clean fit. The cause is too much demand, and higher rates take demand out. Good.
Against cost-push inflation, rates are a blunt and expensive instrument. The Bank cannot make gas cheaper or reverse a tax. All it can do is squeeze demand hard enough to offset the cost shock, which means deliberately slowing the economy and accepting weaker jobs to drag the price level back down. It is treating the symptom, not the cause. This is why you hear central bankers talk about “looking through” a temporary supply shock. They would rather not respond at all, unless the shock starts feeding expectations and wages, at which point they tighten to protect their credibility rather than to fix the original problem.
There is a sharper irony hiding in the measures themselves. The Retail Prices Index, RPI, includes mortgage interest payments. So when the Bank raises interest rates to fight inflation, mortgage costs rise, and RPI mechanically goes up. The cure pushes one of the headline numbers higher in the short run, and because RPI still sets things like rail fares and some student loan interest, those climb too. The newer measures, CPI and CPIH, leave mortgage interest out, so they dodge that particular perversity, though higher rates can still feed into rents over time. It is worth knowing which measure is being quoted at you, because they do not all respond to the cure the same way.
When the government adds to costs
Fiscal policy, the government’s side of the ledger, is usually discussed as a way of pumping up or cooling down demand. But specific measures can act on the cost side instead, and that is where it gets interesting.
Take two changes from the last Budget: a rise in employer National Insurance contributions and an increase in the National Living Wage. Set the politics aside, because the mechanism is what matters here. Both raise the cost of employing people. An employer facing higher staffing costs has three options: absorb it in thinner margins, find offsetting productivity, or pass it on through higher prices. To the extent businesses cannot absorb it, some of that cost lands in prices, which is inflationary. The same measures also reduce hiring and take-home pay, which softens demand, so the net effect pulls in two directions at once. That tension is exactly why supply-side tax changes are so awkward for the Bank: they look a little like an energy shock, nudging costs and prices up while the cure for them, weaker demand, hurts the same people.
One subtlety keeps the picture accurate. A one-off cost increase raises the price level, not the inflation rate forever. A tax or wage change lifts measured inflation for about a year, then drops out of the twelve-month comparison, unless it feeds expectations and the next pay round and becomes self-sustaining. The difference between a one-time step up and an ongoing spiral is the whole game, and it is the thing most commentary gets wrong.
The dimension the headline hides
There is a final piece, and it is the one that connects all of this to why people genuinely feel poor. Inflation is not felt equally.
Lower-income households, and a lot of young adults, spend a far larger share of their budget on necessities: energy, food, council tax, rent or mortgage. You cannot trade down on heating the way you can skip a holiday. So when a bout of inflation is concentrated in those essentials, as the 2022 to 2023 squeeze was, it hits necessity-heavy budgets harder than the average. The effective inflation rate for a poorer household runs above the headline, a pattern the Institute for Fiscal Studies and the Resolution Foundation both documented through the energy crisis. That “feeling poor” is an accurate read of a real loss the average figure quietly understates, not a perception to be talked out of.
This casts the cure in a different light. Using interest rates to fight a shock that came from energy and food asks the households already squeezed by energy and food to absorb a second squeeze, through higher housing costs and a deliberately weaker job market, to solve a problem that was never excess demand. When inflation is supply-driven and concentrated in needs, blunt demand-crushing is both poorly aimed and hardest on the people with the least room to give.
What it means for you
You cannot set interest rates, and you cannot un-raise a tax. But understanding the machinery changes how you read the news and run your own money.
When you hear inflation is “falling”, remember it almost never means prices are dropping. The squeeze you feel is the level, not the rate, and the level is staying up. When your own basket is heavy on necessities, accept that you are probably running hotter than the headline, which is exactly what the personal inflation calculator on this site is there to show you. And when policy slows the economy to bring inflation down, notice that the slowdown is part of the design, not a side effect, which is a reminder to protect your own real income where you can: keep pushing on pay, guard the essentials that have risen most, and do not let savings sit in cash earning less than prices are climbing.
The deeper truth is that the lasting answer to cost-driven inflation, and to living standards, was never going to come from demand management at all. It comes from the supply side: producing more, more efficiently, with cheaper energy and better-functioning markets. That is a growth question rather than an inflation one, which is a subject for another day.
This article is part of the Money Sorted series on moneysorted.money. For the companion guide on how inflation is measured and why your personal rate differs from the headline, read “Why Inflation Feels Worse Than the Number Says“.
Figures: ONS Consumer Price Inflation, UK (May 2026); cumulative price level and real-wage data, ONS and House of Commons Library. Distributional analysis: Institute for Fiscal Studies and Resolution Foundation (2022–2023).