Core and service inflation: do you know the difference?
Learn more about how the different elements of Consumer Price Index (CPI) relate to your everyday costs.
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What’s the difference between interest rates and inflation?
And how do they both affect your savings?
March 23, 2026
Interest and inflation impact our day-to-day lives, from how much money we can borrow for a loan to the cost of our weekly food shop. Read on to learn more about how the two are linked – and why they can both affect your savings.
In short
- Interest is a percentage charged on the total amount you borrow or earned on the total amount you save.
- Inflation is the rate at which the price for goods and services increases.
- The Bank of England may raise or lower the base rate to help influence the UK economy.
How do we measure inflation?
Inflation is a measure of how much the prices of goods (such as food or televisions) and services (such as haircuts or train tickets) have gone up over time.
According to the Bank of England, it’s usually measured by comparing the price of something today to the price of that same thing a year ago. For example, if a loaf of bread cost £1 last year and costs £1.03 today, you could say the price of a loaf of bread has risen by 3%.
In the UK, inflation is measured by looking at the prices of a list of good and services. The Office for National Statistics (ONS) then uses this list to work out the Consumer Price Index (CPI). The Bank of England monitors the CPI to understand inflation over time.
Why the rate of inflation is important
As the Bank of England explains, it’s important for inflation to be stable and not too high. If it fluctuates too often, or goes up too much, it makes it difficult for businesses to set prices for things – like the cost of a new car for example. It also makes it hard for people to plan how to spend their money.
When inflation is too low – or even negative – people may stop or reduce their spending because they expect prices to continue dipping. And if people stop spending, companies could go out of business and people could lose their jobs.
Where does interest come in?
Interest is the percentage charged on the total amount you borrow or earned on the total amount you save. Accounts that offer a service to save or borrow money will probably have an interest rate.
On your savings accounts, most banks will pay interest to you for saving your money with them. If you’ve got a loan from the bank, you (the borrower) will most likely be charged interest on the money you borrow.
If the interest rate increases on your savings account, you will earn more. But if it increases on money you’ve borrowed, you will pay more.
How changes to the Bank of England base rate affect interest and inflation
The Bank of England may raise or lower the base rate to help influence the UK economy.
The base rate will typically be lowered to try to stimulate the economy. For example, if consumer spending is low and fewer people are borrowing from banks, the base rate may be lowered.
This aims to encourage spending and more demand for credit. Because banks set their pricing based on a number of factors – including the base rate – it can become less expensive for borrowers to repay if the base rate falls, but banks may also reduce the interest rates they offer savers.
The Bank of England can increase the base rate with the opposite aim: if this happens, the cost of borrowing may go up, and in turn the interest you earn on your savings could increase too.
The Bank of England will occasionally raise or lower the base rate to help influence the UK economy.
The base rate will typically be lowered to try to stimulate the economy. For example, if consumer spending is low and fewer people are borrowing from banks, the base rate may be lowered.
This aims to encourage spending and more demand for credit. Because banks set their pricing based on a number of factors – including the base rate – it can become less expensive for borrowers to repay if the base rate falls, but banks may also reduce the interest rates they offer savers.
The Bank of England can increase the base rate with the opposite aim: if this happens, the cost of borrowing may go up, and in turn the interest you earn on your savings could increase too.
In summary
The inflation rate and interest rates are intrinsically linked. When the inflation rate is high, interest rates tend to rise too – so although it costs you more to borrow and spend, you could also earn more on the money you save.
When the inflation rate is low, interest rates usually go down. This often helps stimulate spending, as the cost of goods and services is lower – and credit costs you less. But it also means that savings rates go down too.
This article is for informational purposes only and is not a substitute for individualised professional advice. Articles on this website were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs International Bank, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. This article is not a product of Goldman Sachs Global Investment Research. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.
| Savings interest rate (AER)(1) |
Savings Balance Before Paying Tax | |
| Basic rate taxpayer | Higher rate taxpayer |
|
|---|---|---|
| 1% | £100,000 | £50,000 |
| 2% | £50,000 | £25,000 |
| 3% | £33,333 | £16,667 |
| 4% | £25,000 | £12,500 |
| 5% | £20,000 | £10,000 |
The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.
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