Fintech braced itself for the prospect of over 18 percent inflation next year

Several fintechs have already cited inflation as a reason for cutbacks. The fintech world may now face the prospect of more cutbacks and more belt-tightening amid an expected worsening economic environment.

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The fintech world took note yesterday after a leading investment bank warned that inflation could soar to over 18 percent next year.

The grim prediction came from investment bank Citi and would mean inflation in the UK would be 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 over 18 per cent was in 1976, official figures show.

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

For example, Robinhood CEO Vlad Tenev cited “record inflation” as a reason the stock trading app cut 23 percent of its staff earlier this month. Likewise, Klarna mentioned inflation when they cut 10 percent of their employees in May.

Other fintechs have told AltFi they would raise wages to fight rising inflation, including Berlin-headquartered insurtech INZMO and crowdfunding investment platform Crowdcube.

But it remains to be seen whether fintechs en masse will offer employees a pay boost amid an even worsening economic environment.

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

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

In a note to clients, Nabarro said: “The question now is what policy can 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 there be signs of more built-in inflation, we believe that a bank interest rate of 6-7 per cent will be required to bring inflation dynamics under control.

“For now, we continue to believe that evidence of such effects is 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 started raising interest rates, with the latest half a percentage point jump to 1.75 percent.

Markets now predict that the Bank of England will raise interest rates to 3.75 percent by March 2023.

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

Victoria Scholar, chief investment officer, Interactive Investor, said: “Citigroup has said that UK inflation is now ‘entering the stratosphere’ and is likely to peak above 18% by the start of 2023.

“We’ve been inundated with more and more inflation numbers so far this year, so to put the latest outlook from Citigroup into context, this figure of 18.6% at the start of next year would be higher than the peak in 1979 – when the CPI (Consumer) Price Index) reached 17.8% after the oil shock from OPEC (Organization of Petroleum Exporting Countries).

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

“The rise in gas and food prices looks set to push price levels higher, as the Bank of England’s interest rate hikes so far appear to do little to offset supply-side inflationary pressures imported from abroad.

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

“Recession is almost an inevitability at this stage – with consumer confidence at record lows, the latest GDP numbers pointing to a contraction, and now these fresh eye-popping inflation forecasts.”

Myron Jobson, senior personal finance analyst, Interactive Investor, said: “The bitter winter for personal finance is set to go below zero at the end of January if the forecast of inflation of just 19 per cent comes true.

“Double-digit inflation is a tough pill to swallow for consumers as it is, but inflation rising to 18.6% would be unthinkable for the private economy – especially after the festive season, when household budgets are slimmer after Christmas.

“There aren’t enough tools in the personal finance toolbox of tips to shield those living on a budget from rising prices. The benefits of hunting for the cheapest deals are diluted when prices rise across the board – but it’s still very much worth it .

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