Impact of inflation on costs
A client recently asked me my view as to the impact of the current upsurge in inflation on cost matters.
These are my initial thoughts:
- Interest on unpaid costs currently runs at 8%. When the Bank of England base rate was very low, and inflation was very low, this 8% return on unpaid costs was potentially attractive to receiving parties (although this would have to be weighed up against cash flow issues). Now that inflation is running at close to 10%, the 8% rate is no longer particularly attractive as it fails to adequately compensate receiving parties from being kept out of money that is potentially due to them. It is possible, to the extent to which receiving parties give the matter any thought, that this may encourage some to try to settle costs disputes at an earlier stage.
- It remains to be seen as to whether the judgment rate of 8% is increased to reflect the current high levels of inflation. However, given that no attempt was made to reduce the judgment rate during the long periods of relatively low inflation, it may be that a similar approach of inaction will be adopted now. The argument on the other side is that a judgment rate well in excess of what would be commercially available to investors, and well in excess of the rate of inflation, was not problematic as the high judgment rate positively encouraged early settlement and/or sensible payments on account. Conversely, if the judgment rate is no longer even keeping pace with inflation, then it should be revised upwards.
- The current high level of inflation is likely to put pressure on those that set the Guideline Hourly Rates to increase these sooner rather than later, and it was certainly anticipated within the last rate review that these should be updated on a regular basis.