Pricing In The New High Inflation Era
Introduction
For most of the last twenty years, pricing teams, finance directors and private equity owners have worked on a comfortable assumption. Inflation would sit at or near 2%, and a contractual uplift of CPI plus 2%, 3% or 4% would more than protect margins at renewal.
That assumption is now under serious strain. In this article we set out the macro backdrop, how it is feeding into interest rates and prices, and why the "CPI+" price protection clause may no longer be enough.
Setting the scene: the debt mountain and the money supply
Government borrowing is accelerating. US total public debt outstanding reached $40.11 trillion on 21 September 2026, having first surpassed $40 trillion on 18 August 2026. The pace is striking:
Gross debt is $2.67 trillion higher than a year ago and $11.68 trillion higher than five years ago. Over the past year it grew by an average of $7.35 billion a day.
It took more than 200 years for US debt to reach $10 trillion, and only 16 years to add a further $26 trillion.
Servicing that debt is becoming a burden in its own right. The Congressional Budget Office forecasts net interest at almost 14% of federal outlays in FY2026, rising to nearly 15% by FY2028.
The UK picture is no better. Public sector net debt has risen roughly eightfold since the turn of the century. It stood at £364.4bn in 1999 and reached £2,984.9bn at the end of July 2026. There were step changes at the 2008 financial crisis and at COVID: debt passed £1 trillion in 2011, £1.5 trillion in 2016 and £2 trillion in 2021.
As a share of the economy, debt has more than tripled, from 28.4% of GDP in 2000-01 on the OBR's measure to 95.1% of GDP at the end of August 2026 on the ONS headline measure. That is a level last seen in the early 1960s.
What the debt costs each taxpayer
The debt matters because it has to be serviced, and the interest bill is funded by taxpayers.
United States. The CBO projects net interest of just over $1.0 trillion in 2026, making interest the second-largest federal spending category after Social Security. That is roughly $7,100 per taxpayer per year.
That figure understates the direction of travel. The average rate on all interest-bearing Treasury debt is only 3.49%, because much of it was issued when rates were far lower. If the $32.4 trillion of debt held by the public were refinanced at today's 10-year yield of around 5%, the annual interest bill would be about $1.6 trillion. That is roughly $11,600 per taxpayer per year.
United Kingdom. Central government debt interest was £97.6 billion in the year to March 2026, roughly £2,600 per income taxpayer per year.
If the full £2.98 trillion were refinanced at today's 10-year gilt yield of around 5.2%, the bill would be about £155 billion, or roughly £4,100 per taxpayer per year. The UK has an added exposure: interest on index-linked gilts rises with RPI, so higher inflation increases the interest bill directly. In May 2026 alone, the RPI uplift added £4.9 billion to the government's interest bill.
Taxpayer base assumed at c.140 million (US) and c.38 million income taxpayers (UK). The refinanced figures are illustrative: debt reprices gradually as existing bonds mature.
Governments cannot easily raise taxes by these amounts, so the gap tends to be filled by further borrowing, which creates yet more interest. That feedback loop is why many observers believe inflation, which erodes the real value of the debt, is the path of least resistance.
The money supply is growing again. US M2 has risen every month this year and passed $23 trillion, a record. The last time we saw a monetary expansion on this scale, M2 grew by roughly 26% year-on-year in 2020 to 2021, a surge many economists later linked to the inflation that followed.
The bond market is demanding more. When governments borrow at this scale, lenders eventually want paying for the risk. The UK recently sold 30-year gilts at 5.8168%, the most expensive borrowing since the Debt Management Office was founded in 1998. The sell-off is global: Japan's 10-year yield reached 3.00% on 1 September 2026, a level not seen since September 1996.
From bond yields to borrowing costs to prices
Government bond yields are the foundation on which every other interest rate is priced. That includes corporate debt, mortgages, asset finance and working capital facilities.
Today the benchmark rates are as follows:
UK 10-year gilt: around 5.2%. It was trading at 5.20% to 5.23% this week, after reaching its highest level since June 2008 at the start of September.
US 10-year Treasury: around 5.0%. It moved back above 5% after the Federal Reserve raised rates for the first time in three years, taking the Fed funds range to 3.75% to 4%.
Central banks are turning back towards tightening. Fed Chairman Kevin Warsh said inflation is too high and has been for too long, and 16 of 19 FOMC members expect at least one more hike this year. In the UK, the Bank of England held Bank Rate at 3.75% on a 6–3 vote, with three members voting to raise it to 4%. The MPC said CPI inflation is likely to rise further over coming quarters.
These higher rates feed into product prices through three channels:
Cost of capital. Businesses refinancing debt taken on in the near-zero era face materially higher interest costs. That puts pressure on EBITDA and has to be recovered somewhere, usually through price.
Input costs. The energy shock from the Middle East conflict is flowing straight through supply chains. UK motor fuel inflation jumped to 23.0%, with diesel reaching 181.8p per litre. In the US, gasoline prices rose 27.4% year-on-year and fuel oil 52%.
Wages and expectations. Employees facing higher mortgage costs and higher living costs demand higher pay. The Bank of England itself is warning that the risk of second-round effects is growing.
Is this just the beginning?
The official forecasts describe a temporary energy spike. The Bank of England's central projection shows CPI peaking at around 3.2% in the fourth quarter of 2026. We heard similar reassurance in 2021, shortly before UK inflation climbed to 11.1% in October 2022, a 41-year high.
A growing number of investors and commentators believe we are entering a structurally higher inflation era rather than living through a one-off shock. They point to several forces:
Fiscal dominance. Governments with debt close to 100% of GDP have a strong incentive to tolerate inflation, because it erodes the real value of what they owe.
De-globalisation and tariffs. Re-shoring and tariffs add cost to supply chains that spent thirty years getting cheaper.
Energy and geopolitics. Supply shocks from conflict add to inflation directly.
Structural spending. Defence, the energy transition and AI infrastructure all compete for capital and resources.
Central banks buying gold. Their own behaviour is telling: central banks added 41 tonnes of gold in May as debasement hedges gained favour.
Whether or not you share that view, the risk is asymmetric. A business that prepares for higher inflation and doesn't get it gives up very little. A business that doesn't prepare and gets it faces years of margin erosion locked into its contracts.
Why CPI+ price protection may no longer be enough
For two decades, CPI+3% was a generous clause. With CPI anchored near 2%, it delivered roughly 5% a year. The problem is that CPI is a narrow, and some would argue flattering, measure of what is actually happening to costs. Critics go further and call it a managed or manipulated metric.
What CPI leaves out
Housing costs for homeowners. UK CPI excludes owner-occupiers' housing costs and Council Tax. Mortgage interest, which is exactly the cost that rises when rates go up, is not in CPI at all.
The "core" measure strips out even more. Core inflation excludes food and energy, the very items rising fastest right now. In the US, core inflation was 2.4% in August, the lowest since March 2021, while gasoline was up 27.4%.
Methodology choices tend to lower the number. In the US, quality ("hedonic") adjustments reduce the recorded price of goods that improve, even when the customer pays more. Substitution effects assume consumers trade down to cheaper goods when prices rise. Homeowners' costs are measured through an estimated equivalent rent rather than actual house prices or mortgage payments.
It measures a consumer basket, not your cost base. CPI tells you nothing about what your business pays for energy, salaries, employer taxes, insurance, cloud infrastructure or finance.
Official inflation rate versus lived experience
The gap is starker once you look at price levels rather than annual rates. UK food prices rose 30.6% in the three years from May 2021 to May 2024. Before that, it had taken more than 13 years for food prices to rise by the same amount. Annual inflation may now read around 3%, but prices never came back down. They reset at a permanently higher level.
Why this creates a real misalignment for businesses
Indexing to the wrong basket. If your costs are driven by wages, energy and finance and they rise at 6% to 8%, a CPI+3% clause delivering around 6% leaves you standing still at best.
Lag. Most clauses apply a CPI figure published months before the renewal date. In a rising environment, you are always pricing against yesterday's inflation.
Caps. Clauses such as "CPI+3%, capped at 5%" were painless when CPI was 2%. They bite precisely when you need the protection most.
Compounding loss. A shortfall in one year is not recovered the next. It compounds across the whole renewal book for the life of the contract.
Enterprise Value impact. As we set out in a previous article, margin feeds directly into valuation. On £50m of revenue, losing just 1% of margin is £0.5m of EBITDA. At a 15x multiple, that is £7.5m of Enterprise Value.
The Bottom Line
Pricing in the new high inflation era
The combination of record government debt, a re-expanding money supply and bond markets demanding higher yields points to an environment where inflation is higher and more volatile than the one most commercial contracts were written for. The received wisdom of CPI+2%, 3% or 4% was calibrated for a world of 2% inflation that may not return soon and will be insufficient pricing in the new high inflation era -. Businesses that treat their price protection clauses as settled risk seeing their margins, and their valuations, quietly eroded.
In our next article, we will look at how businesses need to change their pricing terms and behaviours to protect themselves. That will cover alternative indices, cost-based escalators, shorter review cycles, removing caps, and how to approach renewal conversations with customers who are facing the same pressures.
About Us
We are Pricing Strategy Partners. We help technology and private equity clients and their portfolio companies with:
· Identifying Value Creation opportunities in target companies
· Providing Due Diligence support to identify future EBITDA growth levers
· Improving renewal and pricing uplift performance across portfolio companies
· Conducting product pricing & packaging reviews and executing pricing research
If you would like to review how resilient your renewal book and price protection terms are to higher inflation, please either contact us or schedule a free 30 minute call.
