How UK inflation erodes cash — and what a real return means

The Bank of England’s target is 2% on the Consumer Prices Index (CPI). ONS CPI in the 12 months to July 2026 was 2.9% (CPIH 3.1%), in the bulletin published 19 August 2026. Those prints move. A decade-long plan that freezes July’s 2.9% as if it were a law is a scenario, not a prediction.

The helper compounds whatever percentage you enter, every year, at a constant rate. Many people type around 2%–3% for long-run planning, or a higher figure to stress-test. Nothing is stored, and nothing is pulled from a live index.

Future cost of the same basket: amount × (1 + inflation)^years. Purchasing power of cash left idle: amount ÷ (1 + inflation)^years. They are reciprocals. On the default, £1,000 × 1.03^10 = £1,343.92, and £1,000 ÷ 1.03^10 = £744.09. Total price rise is 34.4%. Real value lost on idle cash is £255.91.

That is why “I still have the same £1,000 in the drawer” is not the same as “I can still buy the same things.” The notes have not changed. The basket has.

Give the same £1,000 a 5% nominal return, compounded once a year. Nominal value: £1,000 × 1.05^10 = £1,628.89. Real value in today’s pounds: that pot ÷ 1.03^10 = £1,212.05. You are ahead of idle cash in this model, before tax and fees. You are not ahead by the full 5%.

Approximate real annual return = (1 + investment rate) ÷ (1 + inflation) − 1. At 5% and 3% that is 1.05 ÷ 1.03 − 1 = 1.94%. Subtracting the percentages (5 − 3 = 2) is a common shortcut and sits a little high. If the two rates match, real return is 0% before costs. If the investment rate is 0 and inflation is 4%, real annual return is −3.85% — the cash example on the helper.

£1,000 · 3% · 10 years · 5% return. The default: basket £1,343.92, idle cash £744.09, nominal pot £1,628.89, real pot £1,212.05, real annual 1.94%.

£50,000 · 2.5% · 20 years · 6% return. The long-horizon button. The same basket costs £81,930.82 (a 63.9% rise). Idle cash is worth £30,513.55. A 6% pot is £160,356.77 nominally and £97,861.08 in today’s pounds. Real annual return 3.41%.

£200 · 4% · 5 years · 0% return. A small cash sum under the mattress. The basket costs £243.33. Purchasing power is £164.39. Nominal “investment” is still £200. Real annual return −3.85%.

Swap the default inflation to the 2% target and keep the 5% return. The basket is £1,218.99, idle cash £820.35, real pot £1,336.26, real annual 2.94%. Two percentage points of inflation for a decade is the gap between £744.09 and £820.35 of purchasing power on the same £1,000.

A back-of-envelope doubling time is 72 divided by the percentage rate. At 3% inflation that is 24 years. The calculator at 3% for 24 years puts the same £1,000 basket at £2,032.79 — a little over double, because 1.03^24 is about 2.033, not 2. Use the shortcut to sanity-check; use (1 + i)^n when the pounds matter.

CPI is the measure the Bank of England is asked to keep at 2%. CPIH is CPI plus owner-occupiers’ housing costs; it usually prints a little different (3.1% versus 2.9% in that July 2026 release). RPI is an older index still used in some contracts, index-linked gilts, and — for now — some student-loan interest. They are not interchangeable. This helper does not switch baskets. You pick one number.

From 2030, current policy is to bring CPIH methods and data sources into RPI (the UK Statistics Authority has said 2030 at the earliest). That is a future index-construction change, not a rate this calculator applies. Confirm the measure on ONS or the Bank of England when a contract names one.

Year-by-year inflation that goes up and down. Tax on interest or gains. Platform and fund fees. Returns that are not a smooth 5%. Wage growth versus CPI (a different basket). House prices. Historic “what would £1,000 in 2000 be worth?” look-ups of the actual ONS series.

The compound-interest calculator on this site ignores inflation on purpose and models monthly contributions. Use that for “how big is the pot?”, and this page for “what is the pot worth in today’s goods?” Do not add the two percentages together and call it a forecast.

Open the inflation calculator, type an amount in today’s pounds, an annual inflation assumption and a term. Use 0% return for cash. Type a savings or investment rate if you want the second result card. Read future basket cost, idle-cash purchasing power, nominal pot, real pot and the 1.94%-style real annual figure. Nothing you type is stored.

If you also save a monthly amount, project the pot on the compound-interest calculator first, then paste that future value back here as the “amount today” only if you want a rough real-terms haircut — the two tools are not a joint engine. Official CPI/CPIH live on ONS, not on this page.