BT ditches inflation-linked price increase formula

BT is to change the way mid-contract consumer price increases are calculated, opting to give customers a figure in pounds and pence from "early summer." This will replace the current approach where BT adds 3.9% to inflation, based on the Consumer Prices Index (CPI), to calculate price hikes. This is a ubiquitous practice that has become controversial amid the ongoing cost-of-living crisis. 

The change has been made public in a blog by Marc Allera, CEO of BT Group’s consumer division, who wrote that "for new and re-contracting mobile customers we expect this increase to be from £1.50 (for Sim Only and Airtime, for example), and for broadband customers £3." In the meantime, however, the change will have no impact on upcoming mid-contract price rises that will take effect on March 31.

Allera acknowledges the move has been sparked by a consultation into the practice launched by Ofcom. Announced in December, it is proposing a ban on the inflation-plus-3.9% formula, or any formula using percentages instead of the exact amount by which prices change. The consultation will run until mid-February, but BT seems to have decided to act early.

Kester Mann, director for consumer and connectivity at analyst firm CCS Insight, has called BT's decision a "smart move" in emailed remarks to journalists, adding that the firm is "anticipating the likely ban on inflation-linked pricing." He notes the move "gives the operator a short window to promote a clearer and more transparent approach compared to its rivals before most other operators inevitably follow suit."

Related:UK operators cannot clearly explain inflation-plus-3.9% price rises

BT was the first company to start adding 3.9% to inflation to calculate mid-contract hikes to consumer bills in 2020, with the remaining MNOs  – and many MVNOs – following suit. Although inflation was very low at the time, it skyrocketed in following years, with the Consumer Prices Index (CPI) reaching 14.4% in December 2022. As a result, many faced significant increases to their bills that they may not have been expecting, adding to the ongoing cost-of-living crisis.

Growing scrutiny

This prompted scrutiny from Ofcom, which found that the level of understanding among UK consumers of the terms governing mid-contract price increases is generally low. This is despite the fact that over half of them have a contract that is subject to one. As a result, Ofcom argues that "inflation-linked mid-contract price rise terms can cause substantial amounts of consumer harm by complicating the process of shopping for a deal."

Mann says that the "ball is now in the court of the UK's other operators, some of which will probably quickly follow BT's lead." He expects this will be a more delicate matter for some operators than others.

"But for would-be partners Vodafone and Three, it'll mean some crucial decisions given that their pricing strategy will be scrutinized by the competition watchdog as part of a major upcoming investigation into their planned merger," he says.

With the official CPI rate for December set to be announced tomorrow (Wednesday), customers – including BT's – are about to find out how much their bills will increase this spring. It is worth noting that with inflation falling to 3.9% in November, price increases may well end up much lower than last year.

Mann nevertheless notes this has become a highly sensitive topic. "Operators need to tread carefully: in CCS Insight's consumer research last month, nearly three-quarters of people said they would consider acting if their mobile or broadband bill went up again this year," he argues.