The rate of inflation has fallen to its lowest level in some time, indicating that price rises may finally be slowing down.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation was 7.9% in June, down from 8.7% in May and its lowest rate since March 2022.

Most economists had expected the rate of inflation to fall to 8.2% in June.

Core inflation - the rate of price rises that excludes food and fuel - also dropped to 6.9%. 

The majority of analysts now expect that the Bank of England will only increase the base interest rate to 5.25% early next month when 5.5% was likely beforehand.

But how exactly does inflation work, and what is done to actually calculate it?

How is inflation calculated?

On the Bank of England website, it states: "We know the rate of inflation because every month the Office for National Statistics checks the prices of a whole range of items in a ‘basket’ of goods and services.

"They record the cost of over 700 things that people regularly buy. The basket includes everyday things like a loaf of bread and a bus ticket. It also includes much larger ones, like a car and a holiday."

Based on this, the price of the basket tells them what the CPI is.

They add: "To calculate the rate of inflation, they compare the cost of the basket – the level of CPI – with what it was a year ago. The change in the price level over the year is the rate of inflation."

How does inflation work? 

The Bank of England has a target for inflation to keep it around 2% as a low and stable rate helps create a healthy economy.

However, high and unstable rates of inflation can be harmful, as the Bank of England says that if "prices are unpredictable" then people might not be able to plan how much they can spend, save or invest.

The Argus: High and volatile inflation can cause an economy to collapseHigh and volatile inflation can cause an economy to collapse (Image: PA)

In extreme cases "high and volatile inflation can cause an economy to collapse" due to very high price rises for daily goods.

What causes inflation?

Soaring food and energy bills are usually the factors that drive inflation up and have done so for the last year and a half in the UK.

The traditional response to rising inflation is to put up interest rates, which makes borrowing more expensive.

When people have less money to spend, they buy fewer things, reducing the demand for goods and slowing price rises.