Your fixed broadband bill is about to increase? How to protect yourself from anti-inflationary rate hikes
Inflation has caused the biggest rise in UK food prices in 40 years, the last official figures To display. But it’s not just food prices that are soaring – or energy price, Besides. Consumer price inflation could also affect bills for services like Internet and mobile phones.
Many people do not pay particular attention to the contracts they sign for such services. It is common not to read clauses written in fine print. When I recently checked my broadband contract, I was certainly surprised to find that I had subscribed to an annual price increase in line with the inflation rate of January 2023 plus an additional 3.7%.
Although this is a noticeable increase at any time, inflation is expected to be slightly below 10% in January 2023, according to the Bank of England. This could increase my bill by almost 14% when my contract ends next year.
These so-called “inflation-plus” clauses link the contracts to the Consumer price index inflation rate plus an additional amount – in my case, 3.7% of my current monthly broadband rate. For some broadband customers, these clauses could add more than £100 to their annual bills next year, consumer watchdog Which? said.
Inflation-plus clauses are legal. They are written in the contract (although often in lowercase) and by signing we accept them. But they are not fair and the government, as well as the regulators, have a responsibility to look into this issue of rising cost of living.
The first part of the clause – the inflation element – is called “full price indexation to current or past inflation”. This is a strategy that is often used to update price contracts, especially when inflation is highto protect contract signatories against rising costs.
The second part of the clause – the extra percentage above inflation – is a phenomenon that has yet to be labeled by macroeconomists, as far as I know. But after calculating the effect of an inflation plus 3.7% increase on my bill, I like to think of it as “turbo price escalation”.
What is indexing?
During periods of rising inflation, companies have to make frequent price adjustments to compensate for their own rising costs. Indexing provides a simple rule to help companies update their prices between optimal adjustments designed to maximize profits.
There are different types of indexing. Full indexation to current inflation, for example, aligns prices exactly with the current rate of inflation. Other types may increase with inflation, but at a lower rate – or at a higher rate, as with the turbo price peg on inflation plus contracts.
Indexing is not only used by companies providing goods and services. Workers, as well as homeowners and some mortgage lenders, also use this strategy to keep track of changing costs. But the greater the power of the person or organization renegotiating a particular contract – whether it is a worker discussing an employment contract or a company setting new prices for its services – the more inflation indexing is easy to negotiate.
Thus, when inflation rises, indexation protects companies against rising costs. But when it comes to contracts for services like broadband, consumers generally don’t have the same bargaining power as big business. Also, since most employment contracts are not fully indexed, salaries do not increase to match the increase in our bills.
This is one of the reasons why high inflation can harm low-income households After. Unlike high-income people who often have more bargaining power to negotiate a pay rise when prices rise, low-income people’s wages are generally not fully indexed to inflation, let alone turbo-indexed. This means that these clauses can not only raise inflationbut can also aggravate income inequality.
Wage price spiral
Of course, if inflation stays high for a long time, workers can start organizing through unions to demand that their wages be linked to inflation. We have seen this in last months. In this situation, governments often worry on creating a wage price spiral in which rising wages encourage more spending, pushing inflation even higher and causing more wage bargaining.
And by discounting prices more than the rate of inflation, these turbo-pricing clauses could further contribute to such a spiral, worsening the economic environment. Indeed, research shows that the use of indexing makes it more difficult to reduce inflation in this type of scenario.
Economic policy can be used to remedy this situation. But in a period of high inflation and low GDP growth, a government’s fiscal policy may be at odds with a country’s monetary authority or central bank, which generally wants to reduce inflation. Indeed, the government can benefit from high inflation which reduces the cost of a tax cut or an increase in its spending. This is the current situation in the UK.
What can you do?
An independent regulator like the UK Competition and Markets Authority could help consumers to fight against the rise in prices linked to indexation. To research found that wage indexation occurs less when markets are more competitive. Similarly, price escalation should be lower in highly competitive markets.
In other words, more instances of price escalation may signal too little competition in an industry, allowing companies to drive up prices. The Competition and Markets Authority is responsible for investigating such concerns about market structure, with the aim of increasing competition and protecting consumers.
Otherwise, just like workers, consumers can bargain to reduce inflationary price increases in the costs of services like internet or cellphone coverage. Not everyone has the time, patience, or confidence to call suppliers to get a cheaper deal at the end of a contract. But research shows that people who stay on more expensive fares are usually finance the cheapest offers informed consumers ready to haggle.
With more sophisticated consumers, companies would not find it as practical to introduce such clauses, as they would not generate enough additional profit from these turbo price increases.