The Office for National Statistics (ONS) has only recently published the last full year’s data. The United Kingdom’s Consumer Prices Index (CPI) reached a 3.8% annual rate for the year ending September 2025. This figure is still in line with July and August 2023 inflation rates. The ongoing nature of high inflation has kept questions alive about the root causes of this peculiar economic development.
Over the course of 2022, inflation in the UK rose at an 11% annualized rate. The surge in demand for oil and gas following the Covid-19 pandemic, exacerbated by geopolitical disruptions stemming from Russia’s invasion of Ukraine, drove much of this increase. At the height of that time, inflation reached a high of 11.1% in October 2022, the highest rate in the last four decades. Although inflation has notably decreased since its October 2022 zenith, prices for many goods and services continue to rise, indicating lingering inflationary pressures.
That marked the end to a year of core CPI ending in September 2025. This measure excludes more volatile components such as food and energy. The core PCE deflator is especially important because it offers a clearer picture of the underlying trends of inflation. Read more on how the Bank of England tracks core inflation. The Fed uses this measure to guide its interest rate decisions as it accounts for the more volatile price shifts.
Food and non-alcoholic beverages are an area that has driven inflation. For the trailing year ending September 2025, the CPI inflation averaged 4.5%. Conversely, these very critical goods affect the consumers’ pocketbooks and real purchasing power and living standards. To determine inflation, the ONS tracks prices of hundreds of everyday items and uses a virtual “basket of goods” approach. We’ve updated this basket several times to reflect what people are buying today, and where shopping habits are shifting. In 2025, we included new inventory such as virtual reality headsets and yoga mats!
Consumer inflation rates have been falling since the end of 2022. Though the markup over raw material costs is fading, the steady increase in prices remains a concern to consumers and decisionmakers. As the UK has remained under a different economic condition, the Bank of England has reacted to these conditions by increasing interest rates. In an effort to combat inflation above its long-term goal of 2%, the central bank hiked up interest rates to 5.25%. This initiative is intended to reduce inflationary pressures in the economy by reducing spending and borrowing to bring down overall spending.
The inflation picture is mixed at best across the rest of America. Take, for example, the current interests of the United States, which in September 2025 was reported as experiencing an inflation rate of 3%. In June 2024, the European Central Bank (ECB) waded into uncharted waters by reducing its current main interest rate from 4% to 3.75%. This decision is an example of bold and creative thinking when it comes to addressing inflationary pressures in the Eurozone.
Interest rates in UK are soaring during the current cost-of-living crisis. The effects will soon be felt by consumers on their day-to-day financial choices. We know from experience that higher interest rates increase borrowing costs, straining mortgage and consumer loans, raising the interest rate on deposits and other savings vehicles. These changes can create a ripple effect on consumer spending and broader economic growth.