Fintech braced for prospect of above 18 per cent inflation next year

The fintech world took note yesterday after a leading investment bank warned inflation could spiral to above 18 per cent next year.

The gloomy prediction came from investment bank Citi and would mean UK inflation would be at nine times the Bank of England’s target and reach its highest point in more than 40 years.

The last time consumer price inflation was last above 18 per cent was 1976, official figures show.

Amid already spiralling inflation across Europe and the US, several fintechs have been forced to cut staff, citing inflation as a cause.

For example, Robinhood CEO Vlad Tenev cited “record inflation” as a reason the stock trading app was cutting 23 per cent of its staff earlier this month. Likewise, Klarna cited inflation when cutting 10 per cent of its employees in May.

Other fintechs have told AltFithey would be increasing salaries to combat rising inflation, including Berlin-headquartered insurtech INZMO and crowdfunding investment platform Crowdcube.

But it remains to be seen if fintechs en masse will be offering staff a pay bump amid an even worsening economic environment.

Last week, Office for National Statistics said inflation had soared to a 40-year peak o 10.1 per cent in the 12 months to July.

Citi economist Benjamin Nabarro said the new inflation forecast factors in a 25 per cent increase in wholesale gas prices last week and a 7 per cent rise in wholesale electricity prices.

In a note to clients, Nabarro said: "The question now is what policy may do to offset the impact on both inflation and the real economy."

He added: “This means getting rates well into restrictive territory, and quickly."

"Should signs of more embedded inflation emerge, we think Bank Rate of 6-7 per cent will be required to bring inflation dynamics under control.

"For now though, we continue to think evidence for such effects are limited with increases in unemployment still more likely to allow the MPC to pause around the turn of the year."

To combat inflation, the Bank of England has already began hiking rates, with the most recent a half a per cent point jump to 1.75 per cent.

Markets are currently predicting Bank of England will raise interest rates to 3.75 per cent by March 2023.

The head of investment at interactive investor, the investment platform said a recession was “almost an inevitability at this stage”.

Victoria Scholar, head of investment, interactive investor, said: “Citigroup has said UK inflation is now ‘entering the stratosphere’ and is likely to peak above 18% at the start of 2023.

“We have been inundated with more and more inflationary figures so far this year, so to bring the latest outlook from Citigroup into context, this 18.6% figure at the start of next year would be higher than the peak in 1979 - when CPI (Consumer Price Index) hit 17.8% following the OPEC (Organisation of the Petroleum Exporting Countries) oil shock.

“However, Citigroup’s forecast comes at a time when price levels have already been surging - moving into double digits in the latest reading for July, ahead of analysts’ expectations.”

 “The rise in gas and food prices look set to push price levels higher, as the Bank of England’s interest rate increases, so far, seem to be doing little to offset supply side inflationary pressures imported from abroad.

“In addition, supply chain bottlenecks, the war in Ukraine, as well as Brexit, have all contributed to the post-pandemic revival in inflation.

“Recession is almost an inevitability at this stage - with record low consumer confidence, the latest GDP figures pointing to a contraction, and now these fresh eyewatering inflation forecasts.”

Myron Jobson, senior personal finance analyst, interactive investor, said: “The bitter winter for personal finances is set to hit sub-zero by the end of January if the prediction of inflation just shy of 19 per cent comes to fruition.

“Double-digit inflation is a difficult pill to swallow for consumers as it is, but inflation soaring to 18.6% would be unimaginable for personal finances – particularly after the festive break, when household budgets are leaner post-Christmas.

“There are not enough tools in the personal finance box of tips to shield those living on a bare bone budget from rising prices. The benefits of shopping around for the cheapest deals is diluted when prices are rising across the board – however, is still very worthwhile. 

“The harsh reality is many more UK households could face financial breaking point without meaningful intervention.”