Benefits and Compensation

Continued Inflation and Employee Compensation

Many companies have weathered the impacts of inflation on the cost of their production inputs by simply passing such costs on to consumers; however, as central banks, led by the U.S. Federal Reserve, continue to raise interest rates, consumer spending is likely to decrease, hampering employers’ ability to pass along costs.

One of the biggest expenses for any company is labor, and employees are beginning to pay much closer attention to how inflation is impacting their relative compensation. When inflation is exceeding 8% per year, a 5% pay raise represents a 3% decrease in compensation in real terms.

“Inflation in the United States accelerated in September, with the cost of housing and other necessities intensifying pressure on households, wiping out pay gains that many have received and ensuring that the Federal Reserve will keep raising interest rates aggressively,” writes Christopher Rugaber and the Associated Press in an article for Fortune. “Consumer prices rose 8.2% in September compared with a year earlier, the government said Thursday. On a month-to-month basis, prices increased 0.4% from August to September after having ticked up 0.1% from July to August.”

As the labor market remains tight, employers need to be extremely careful with how they approach employee pay raises. Employees who recognize that their compensation is being whittled away by rising consumer prices may look for more lucrative employment elsewhere. At the same time, employers have to be conscious of the extent to which they can continue to pass the costs of inputs (including inflation) onto consumers as interest rate hikes curb consumer spending.

At a minimum, employers should have conversations with staff about the impact of inflation on employee compensation. If, for whatever reason, employers are unable to increase wages in line with consumer prices, they should be prepared to very clearly and convincingly present that message to workers to proactively address the urge some may feel to look elsewhere for employment.

Lin Grensing-Pophal is a Contributing Editor at HR Daily Advisor.