Core and service inflation: do you know the difference?

Similar to the CPI, core inflation (also known as Core CPI) measures the price of a selection of goods and services but strips out volatile prices such as food and energy. These categories are removed to create a more stable measure of underlying inflation trends. For example, food prices can be impacted by short term weather events that are not related to the economy. By removing this category, economists can get a better understanding of long-term inflationary pressures.

Energy and food prices are also less price elastic. This means that the supply and demand of these items remains fairly steady and so plays less of a role in their cost. Makes sense, right – people still need to put petrol in their cars and buy their weekly shop, even if it costs a bit more.

When we asked UK adults which costs they’re most worried about in relation to inflation, groceries (68%) and energy (68%) came out top. Given these two items play such an important role in our everyday lives, it’s not surprising that they’re top of mind. However, if you want to keep an eye on how these costs are changing, then core inflation won’t be the best measure to track as it excludes these categories. Instead, check out CPI or even the food and energy inflation breakdowns.

Service inflation

Service inflation looks only at the service-related categories like education, hospitality and culture. By breaking down CPI to only look at services, economists can look closely at the different forces that influence this type of inflation. For example, labour market and unemployment has been shown to play more of a role in service inflation compared to goods inflation.

The UK is a majority service-based economy, meaning most jobs revolve around providing services rather than creating products. This means that service inflation has a large influence on overall inflation. The Investment Strategy Group for Goldman Sachs Wealth Management predict that service inflation will remain persistent in the UK and prevent a sharp fall in underlying inflation for 2023. Job market resilience and wage growth are contributing factors.

Our research has suggested that UK adults are less concerned about service inflation as the cost of holidays (21%), eating out (20%) and entertainment (12%) were what respondents were less worried about. Perhaps this is down to these costs being seen as more of a luxury and so more avoidable.

Even if annual service inflation rate rose to 7.4% in June and could be keeping CPI figures high, other costs that you’re maybe more worried about could be starting to plateau. For example, energy inflation is down to 2.9% in the year to June from 8.10% in the year to May.

The final word

Inflation impacts so much of our day-to-day: from the chocolate bar that’s gone up by 10 pence, to the holiday that’s now out of your budget. By breaking down exactly which parts of inflation are changing, you could be better equipped to plan your savings budget.

Read more about how inflation impacts your savings.