20 November 2023 How Inflation Impacts Law Firms

Full Disclosure:​

How Inflation Impacts Law Firms​

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Hi Reader 👋🏽,

Rarely do I open the Financial Times to find a story that isn’t about rising prices, interest rates, or an announcement from the Federal Reserve.

BUT inflation is falling.

Don’t worry if you have no idea what that means. I was in the same place when I began applying to law firms.

What I like the most about the financial and legal world is that it’s a solvable puzzle. Put the pieces together step by step and you’ll feel it click.

Let me explain.

Inflation refers to prices going up in an economy over a period of time. It’s expressed as a percentage, which refers to the rate at which prices increase.

For example, if inflation was 5%, we might expect the price of a chocolate bar to increase from £1.00 to £1.05.

Now prices going up is not a bad thing. It’s normal in an economy where more people want to buy things than the supply that is available. Businesses increase their prices to meet the demand.

What we don’t like is when inflation spirals too high. If the prices of goods and services are going up more than they used to, you can’t buy the same amount of stuff with the money you have.

When inflation is too high, when prices are going up everywhere, people struggle to afford day-to-day goods and services.

Inflation has led to the cost of living crisis right now.


What caused inflation?

During COVID-19, people and businesses stopped spending like they used to.
When the lockdown restrictions were lifted, a surge in demand for goods and services led businesses to increase their prices.

This is what we call demand pull inflation.

Inflation has also been caused by ‘supply shocks’, like Russia’s invasion of Ukraine. These events lead to shortages in the supply of goods and services, such as oil, which causes prices to rise.

Facing increased costs for their raw materials, businesses will often raise their prices in return. This is called cost push inflation.



What about interest rates?

Countries have a big bank that is in charge of keeping prices stable. This is the central bank.

Central banks influence interest rates in an economy. When inflation rises, central banks increase the interest rate to reduce inflation.

A higher interest rate makes it more expensive to borrow money and more attractive to save money. This leads to a fall in spending.

If there is less spending in an economy, businesses lower their prices to attract more demand.

Falling prices = falling inflation.

This is what has happened in the UK. Inflation rose after the pandemic, reaching 10% in January 2023. The UK’s central bank, the Bank of England, has increased interest rates in response. This week, it was announced that inflation fell to 4.6%.

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Why is this relevant to law firm interviews?​

Law firms will ask you questions about the news.

Dechert and Latham & Watkins, for example, have asked questions on this exact topic:

• Can you explain what inflation means in layman terms?​
• What are the main drivers of inflation in the economy right now?​

How does inflation impact law firms?

I know many of you worry about connecting a news story to a law firm.

I want to give you a simple framework to connect any story to a law firm. Just think of the three letters B-C-C.

Let's apply the framework to inflation:

B: How does inflation impact the law firm's business model?

Law firms are just businesses. They face the same economic events that impact any business.

Inflation has squeezed profit margins for law firms.

Inflation has caused higher expenses (such as rent and technology investments), higher borrowing costs (thanks to rising interest rates) and a slowdown in income, as companies hold off on dealmaking.

C: How does inflation impact the law firm's clients?

Let's focus on the corporate practice area here.

Facing higher prices, lower demand and an uncertain future, corporate clients have held off on M&A deals. This is especially the case when higher interest rates makes it more expensive to borrow money.

The number of M&A deals has reached a 10-year-low.

C: How does inflation impact the law firm's competitive advantage?

Now is the time to pay closer attention to the finances of a law firm. Salaries, rent and technology are a law firm's biggest expenses. Salary costs have surged after many of the leading law firms increased lawyers' wages to keep up with the competition.

Facing rising prices, law firms might evaluate their technological needs. How could they use technology to bring down their staffing costs? Alternatively, law firms could charge higher rates to clients to offset their rising costs.

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Have any thoughts? I'd love to hear your perspective below!