In late 2022, UK inflation hit a 40-year high of 11.1%, a figure that dominated news cycles and household budgets. Since then, the headline number has been steadily falling, moving closer to the Bank of England's 2% target. But this single percentage point, while important, masks a more complex story unfolding within the economy.

Beneath the surface, different parts of the economy are experiencing price changes in very different ways. Understanding these nuances is key to making smart financial decisions, whether you're saving for a deposit or investing for retirement.

Economists often talk about two types of inflation: headline and core. Headline inflation is the overall rate you hear about most often. It includes everything in the typical 'basket of goods,' from a loaf of bread to a litre of petrol.

Core inflation, however, provides a different lens. It excludes volatile items like food and energy, whose prices can swing wildly due to global events like wars or poor harvests. By stripping these out, core inflation gives policymakers a clearer signal of underlying, long-term price pressures within the domestic economy. It helps them see through the short-term noise to the real trend.

In the post-pandemic era, this distinction has been crucial. While falling energy prices have helped pull the headline rate down, core inflation has remained stubbornly high. This points to a deeper issue: the divergence between the price of goods and the cost of services.

Think of it this way: the price of a new television (a good) might be falling because global supply chains have recovered and shipping costs are down. However, the price of a haircut (a service) is still rising because the salon's main costs are wages and rent, both of which have increased significantly. This is why services inflation is often described as 'sticky' – it's slower to fall back down because it's tied to the domestic job market.

To get an even more accurate view, particularly for homeowners, the Office for National Statistics (ONS) produces another measure called CPIH. This stands for the Consumer Prices Index including owner occupiers' housing costs.

Standard CPI tracks the cost of private rents but doesn't capture the housing costs for people who own their homes. CPIH attempts to fix this by including an estimate of what homeowners would pay to rent their own property. This makes it a more comprehensive measure of the cost of living, especially for financial planning and wealth management, as housing is the largest expense for most households.

The divergence between CPI and CPIH can be important. When mortgage rates rise, the housing cost component of CPIH also tends to increase, even if other prices are stable. This gives a fuller picture of the financial pressures facing a large portion of the population.

High inflation directly impacts your savings and investments by eroding their value. The key concept here is the difference between nominal and real returns.

• Nominal return is the stated interest rate or investment growth. If your savings account pays 3% interest, that's your nominal return.
• Real return is your nominal return minus the rate of inflation. If inflation is at 4%, that 3% savings account has a real return of -1%. Your money is growing, but its purchasing power is actually shrinking.

This reality is what fuels the 'cost-of-living' crisis. Even with wage increases, if inflation is higher, people's disposable income falls. This has led to a noticeable shift in consumer behaviour, especially among middle-income savers.

When cash held in standard savings accounts is losing value in real terms, people start looking for alternatives. There's often a move away from liquid cash towards investment wrappers like Stocks & Shares ISAs or pensions. While these carry more risk, they also offer the potential for returns that can outpace inflation over the long term, preserving and growing wealth.

Let's test your understanding of these key inflation concepts.

Navigating the economic landscape requires looking past the single headline number. By understanding the forces driving core inflation, the stickiness of services, and the impact on your real returns, you can make more informed decisions to protect your financial future.