Dean Clarke/ShutterstockUK inflation has dropped to 3.6% but it remains well above the Bank of England’s 2% target. Beyond broader global uncertainties, there are also factors within our own homes that are quietly sustaining this stubborn issue. Namely, automatic annual price uplifts in everyday contracts for things like mobile phones and utilities.
UK inflation is expected to become the highest in the G7 this year and next. In turn, surging costs for fuel, raw materials and transport are putting pressure on businesses.
And these pressures can seriously threaten profits. This is particularly true for fixed-price contracts for anything from telecoms and insurance services to utilities and public procurement agreements.
To safeguard themselves, many suppliers now seek to include automatic price-adjustment provisions (known as indexation clauses) in their agreements. These link contract prices to an external index such as consumer prices or their own costs.
Inflation-linked pricing has already driven above-inflation increases in mobile and broadband bills. Communications regulator Ofcom banned mid-contract price rises linked to inflation from this year. This came after it found that around six in ten broadband and mobile customers faced annual rises linked to inflation plus a fixed 3.9%.
As a result of the move, many companies have switched to fixed annual price rises, stated in pounds and pence, at the time of signing. This change has improved transparency, but the underlying issue remains.
Annual price increases are often set above the actual inflation rate. When prices are automatically adjusted by more than inflation (through inflation-plus clauses, or what has been called “turbo price indexation”) they can create a multiplier effect. Higher prices feed into higher costs and expectations, which in turn push inflation up further.
This self-reinforcing cycle makes it harder for inflation to return to the Bank of England’s 2% target and amplifies cost-of-living pressures.
The problem extends far beyond telecoms. Public-sector and business-to-business contracts often include similar clauses, embedding annual price increases regardless of economic conditions. For instance, one UK catering contract we saw stated: “All prices quoted are subject to a 10% increase as of 1 October annually.”
Government procurement rules acknowledge the practice. The Ministry of Defence’s spending watchdog instructs defence contractors and the MoD to build in an “escalation factor” to reflect expected inflation when determining allowable costs. At least for government contracts, this escalation factor is meant to capture the estimated effects of inflation rather than being fixed at an earlier date or detached from a price index.
Although these clauses were originally meant to protect firms from rising costs, they now risk locking in inflation. This sustains price increases even when cost pressures ease.
It also weakens the effectiveness of monetary policy – in this case, interest rate changes – because when companies automatically increase prices, higher interest rates take longer to slow inflation. And of course, it erodes the purchasing power of households on fixed incomes.
Breaking the inflation loop
New regulation aimed at improving transparency (as with the Ofcom case) is an important precedent. It’s also a model for other regulators in sectors such as energy, insurance and public procurement, where competition remains weak. However, Ofcom’s approach could be refined in three ways.
First, where consumers lack bargaining power (especially in sectors such as utilities, insurance or business services) regulators should act more broadly to limit unfair contract terms and prevent automatic price increases that go beyond inflation. And they should continue to pursue more competition in their sectors as a long-term goal.
Second, regulators could restrict unconditional price increases that are not linked to inflation or clear cost measures. Inflation caps could be introduced instead. For example, price increases could track the Bank of England’s 2% target, with a small margin of adjustment based on the previous year’s average. This would still give suppliers some flexibility to cover real cost changes, while preventing excessive or uneven increases.
Third, transparency is essential. Beyond Ofcom’s ban on inflation-linked price rises in telecoms, regulators could force suppliers to separate the original base price from the uplifted portion that reflects inflation or indexation.
Showing both figures would make it easier for customers to see how the increase has been calculated. This would allow clearer comparisons within a company’s own deals – for example, between flexible and fixed-price contracts – and across producers.
Beyond this, the rules around public bodies’ contracts could be modernised. Automatic annual price increases written into “escalation clauses” should be replaced with adjustments explicitly linked to recent or forecast inflation. This would ensure that public contracts reflect actual economic conditions, rather than guaranteeing price increases by default.
Voluntary codes of practice could also have a place. Industry bodies, for example in telecoms or catering, could adopt clearer and more transparent pricing standards. Requiring firms to publish the formulas they use in consumer and business-to-business contracts would make it easier for customers to compare.
Most recently, the Competition and Markets Authority launched a major consumer-protection drive focused on online pricing practices – a sign that regulators are scrutinising how companies present and justify price increases.
Dot the Is, cross the Ts and check the indexation clause.
KT Stock photos/Shutterstock
For consumers, it’s worth checking contracts carefully before signing – especially small-print clauses referring to “annual adjustments”, “indexation” or “inflation-linked increases”. These can lock in automatic price hikes that may exceed inflation. Asking providers to explain how these clauses work, or negotiating fixed-price terms, can help avoid unexpected costs later on.
At the end of the day, the government, Bank of England and regulators should be working together to ensure that indexed contracts do not undermine efforts to bring inflation down. Recognising and reviewing inflation-linked pricing practices could help explain why UK inflation remains stubbornly above target – and why monetary policy and interest rate changes alone may not be sufficient to bring it down.
The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.