What Is CPI Inflation?
Consumer Prices Index (CPI) inflation measures the annual rate of change in prices paid by households for goods and services. It is calculated by the Office for National Statistics (ONS) and covers a basket of 700+ products and services. CPI is the measure the Bank of England uses to set its 2% inflation target. When inflation is above 2%, the Bank typically raises interest rates to cool demand. When inflation is below 2%, the Bank cuts rates to stimulate the economy. This framework, established in 1997 when Gordon Brown gave the Bank independence, has been central to UK macroeconomic stability for nearly three decades.
The Blair Era: The Independence Dividend (1997–2007)
When Gordon Brown granted the Bank of England independence in May 1997, he set a 2% inflation target and gave the Bank full control of interest rates. This decision is widely regarded by economists as Britain's most important economic policy move of the modern era. The Bank could now raise rates without political interference when inflation threatened.
The result was dramatic. Inflation, which had averaged 3–4% under John Major, fell to an average of 2.0% under Blair and remained stable throughout his tenure. For a full decade, households experienced low, stable inflation — perfect conditions for wage growth, planning, and business investment. This period is called the "Great Moderation": inflation-driven crises seemed to be solved. Inflation averaged around 2.0–2.5%, within the Bank's target band. This stability was a major political achievement for Blair and became the foundation of New Labour's economic credibility.
The Brown Era: The 2008 Crisis (2007–2010)
Gordon Brown inherited the stable inflation environment from Blair. For the first year of his tenure, inflation remained controlled around 2–3%. Then the 2008 financial crisis struck. Oil prices spiked (reaching $147/barrel), and commodity prices surged. Inflation temporarily peaked at 5.2% in 2008. However, the subsequent global recession and collapse in demand quickly brought inflation back down. By the time Brown left office in 2010, inflation had returned to 2.7% and was falling. The Bank's independence framework proved robust: despite a severe crisis, inflation was managed without policy paralysis.
The Cameron Era: Austerity and Stability (2010–2016)
David Cameron and Chancellor George Osborne inherited the 2008 aftermath. They introduced austerity — deep public spending cuts — on the grounds that the state deficit had become unsustainable. Inflation during Cameron's tenure averaged 2.3%, comfortably near the 2% target. A temporary spike to 5.2% occurred in 2011 (following commodity price increases and VAT rises) but inflation was soon brought back under control by the Bank of England.
The political issue under Cameron was not inflation but wage stagnation: inflation was low but wages were growing more slowly, creating what became known as the "cost of living crisis" — not because prices were rising rapidly but because wages weren't keeping pace. This distinction is important: Cameron inherited and oversaw stable inflation, but real living standards for many households fell because nominal wage growth lagged even the modest inflation rate.
The May Era: The Brexit Shock (2016–2019)
Theresa May took office after the Brexit vote in June 2016. The pound fell sharply against the dollar and euro — a devaluation that raised the price of imports. Inflation spiked to 3.1% in 2017, above the Bank's target, driven by the weaker pound. However, inflation subsequently fell back toward 2%, and by the end of May's tenure, inflation was around 2.5%. Despite the Brexit shock, inflation was managed within a reasonable band. Crucially, the pound's depreciation was allowed to happen — no artificial currency support was attempted — which allowed inflation to remain modest relative to what might have occurred with alternative policies.
The Johnson Era: Post-COVID Surge Begins (2019–2022)
Boris Johnson entered office with inflation stable around 1.5–2%. For the first year of his tenure, inflation remained subdued. Then COVID-19 struck in early 2020. Lockdowns disrupted supply chains globally. Central banks, including the Bank of England, cut rates to near-zero to support the economy. Governments, including the UK, deployed unprecedented fiscal support (furlough schemes, business grants, expanded welfare).
By late 2021, supply chains remained broken, energy prices were spiking (partly due to post-lockdown demand rebound, partly due to OPEC production decisions), and logistics costs were soaring. Inflation began to rise: 2% → 3% → 4% → 5%. The Bank of England warned that inflation was "transitory" (temporary). But transitory inflation turned into persistent inflation. By the time Johnson left office in September 2022, inflation had reached 10.1% — the worst figure in 40 years. The cost of living crisis was real: households struggled to afford heating, fuel, and food. Real wages collapsed. Strikes erupted across public sector. Johnson's government faced a political crisis of legitimacy.
The Truss Era: The Crisis Accelerates (September–October 2022)
Liz Truss took office on 6 September 2022 with inflation at 10.1%. She promised to tackle the cost of living crisis. Her plan: the "mini-budget" of 23 September 2022, which included unfunded tax cuts (abolishing the 45p top rate, removing the National Insurance rise Sunak had planned, and increasing public spending without offsetting revenue). The budget was not properly assessed by the Office for Budget Responsibility.
Market reaction was immediate and severe. The pound fell 5% in a day — its sharpest drop since the 1985 Plaza Accord. Gilt yields (UK government bond prices) spiked, signalling a loss of confidence in UK fiscal management. The pound's depreciation made imports even more expensive, feeding inflation. Within weeks, inflation reached 11.1% in October 2022 — the peak of the crisis and the highest figure in 41 years. While the underlying inflation surge was partly inherited from global factors (energy crisis, supply chains), Truss's mini-budget accelerated the pound's decline and therefore the inflationary pressure. Her tenure lasted 49 days, but the damage to inflation dynamics was real.
The Sunak Era: Disinflation (September 2022–July 2024)
Rishi Sunak took office on 25 September 2022 with inflation at 10.1% and rising (peak 11.1% hit a month later on his watch, inherited from Johnson and Truss). He made "halving inflation" one of his five key pledges. The mechanism was the Bank of England: the Bank raised interest rates aggressively from 0.5% to 5.25% between December 2021 and September 2023, the fastest tightening cycle in decades. Higher rates reduced demand, brought inflation down.
By January 2023 (Sunak's first month), inflation stood at 10.7%. By end 2023, inflation had fallen to 5.3%. By July 2024 (end of Sunak's tenure), inflation had reached 2.2%. The pledge to halve inflation was technically delivered, though the mechanism was Bank of England policy (independent central banking), not government policy per se. Still, Sunak's government's restraint on fiscal spending (avoiding further pressure on inflation) was important. The verdict on this pledge: KEPT (though with caveats about attribution).
The Starmer Era: Stabilization (July 2024–Present)
Keir Starmer took office on 5 July 2024 with inflation at 2.2% — back to near-target levels. Labour's economic approach has emphasized fiscal discipline and avoiding further inflation-driving fiscal support. The Bank of England has begun to cut rates (returning to 4.75% by March 2026) as inflation has stabilized near the 2% target. Current inflation is estimated at 2.6%, slightly above the target but within the normal band.
The cost of living crisis of 2022-23 has faded, though household finances remain damaged: energy bills remain above pre-crisis levels, mortgage rates are higher (though falling), and real wages have only recently begun to recover. The inflation crisis has passed, but the scars remain.