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Nearly a third of UK businesses plan to use algorithmic tools to set prices in response to market conditions. This is evident from an analysis by the Bank of England, which shows that it will become more challenging for the central bank to track inflation trends.
This was said by Clare Lombardelli, the central bank’s deputy governor for monetary policy article published on Tuesday that all sectors would make greater use of dynamic and personalized pricing in the coming year, according to BoE surveys of business leaders.
The sharpest increase will be in the use of tools that adjust prices in response to changes in demand, capacity or competitive movements, she wrote. 31 percent of companies plan to use these tools within a year, compared to 21 percent now.
This kind of market-dependent algorithmic pricing has already become standard practice on online travel sites, where about 80 percent of hotel room rates change at least once a month. This has led to unexpected price spikes, which can distort the overall UK inflation figure when a festival, football tournament or major concert leads to high demand for rooms.
Surge pricing strategies are already politically controversial, with sky-high prices for the Oasis reunion tour prompting British Prime Minister Sir Keir Starmer to launch a review of regulations on ticketing practices in 2024.
But Lombardelli said its use would likely spread to other sectors, such as retail, where electronic shelf labels allowed prices to be adjusted more frequently.
More and more companies were also adopting personalized pricing strategies, she noted, whether through loyalty cards, more customized discounts or “nudges” toward higher-margin products, meaning different customers pay different prices for very similar goods and services.
“A world with more fluid and tailored prices could make life harder for statisticians,” Lombardelli said, both because it made inflation more volatile and because it put pressure on the whole concept of measuring “representative” prices for a basket of goods and services.
“Households already face different inflation rates because they buy different things,” she wrote. “If prices for the same thing differ, inflation becomes even more personalized – and aggregate measures may no longer reflect the experience of households.”
There was no evidence yet that algorithmic pricing in general had led to higher inflation, she noted, saying it “did not appear to be an inflation threat” for now.
But it could add to the BoE’s concerns that household expectations of future inflation are rising, further entrenching inflationary pressures.
Lombardelli said that if dynamic prices became common for basic products such as fuel or food that people buy every day, the fact that prices would change more often “could cause the perception of inflation to rise – even if average prices do not.”
