Have you ever felt cheated by the small print in your mobile contract, confused by a maze of insurance options, or trapped in a subscription you didn't mean to sign up for? If so, you are far from alone. A new analysis suggests that the way markets for essential services function is not just a monumental headache for consumers, but is also damaging the UK's economic health.
The Productivity Predicament and Sticky Inflation
In a paper titled "Getting Britain Out of the Hole," economists Andrew Sissons and John Springford propose a more muscular approach to fixing key service markets. They argue that a lack of proper competition is a significant factor behind the UK's frustratingly persistent inflation.
While soaring goods prices, chiefly energy, drove the initial post-Covid price surge, it has been services inflation that has proved stubborn. Part of this stems from rising wages and the £25bn increase in employer national insurance contributions introduced by Chancellor Rachel Reeves, costs which companies have passed on to customers where possible.
However, the authors identify another critical problem: regulatory failure. "Too many markets for services are beset by problems with limited competition, ineffective regulation or problematic market structures that hurt consumers and make services inflation more persistent than it should be," they contend.
How Consumers Are Being Shortchanged
The issues vary by market, but customers frequently face a confusing array of complex tariffs, endure shocking automatic bill increases, or struggle to cancel online subscriptions. The report highlights that since 2022, there has been a noticeable spike in inflation every April, coinciding with automatic price hikes in many phone and broadband contracts.
These unwelcome spring increases are often pegged to the Retail Prices Index (RPI) plus an extra percentage point. RPI is an outdated inflation measure that typically runs higher than the Consumer Prices Index targeted by the Bank of England. The authors call for regulators to strictly limit the use of these "RPI-plus" contracts.
In other cases, the rip-off is more subtle. Markets may have many players, but the baffling complexity of products and the hassle of comparing and switching mean only the most determined consumers get a fair deal. This is a core problem of "information asymmetry" – companies exploit their superior knowledge and data about consumer behaviour.
A Call for Better, Not Less, Regulation
Since coming to power, Rachel Reeves has urged regulators to consider economic growth, often implying a need to "tear down regulatory barriers." In contrast, Sissons and Springford argue that to make markets work for consumers and the economy, regulators may need to be better resourced and more interventionist.
Their radical proposals include:
- A new rule that any service subscribable online must be cancellable online.
- Making auto-renewing contracts the exception, not the norm.
- Having regulators define standard, plain-vanilla products in certain markets, allowing for genuine price and service competition.
While Labour's rhetoric on regulation has often echoed the laissez-faire approach of the previous government, the evidence suggests that better regulation is essential to foster dynamic markets and stop consumers from being systematically shortchanged.
