Understanding the Wage-Inflation Cycle in Today’s Economy

The price of a Big Mac is 7% higher this year than last year. The National Restaurant Association reported fast food prices have risen 7.2% this year. This is the biggest increase since 1981.

It’s no secret that we are in the middle of a gigantic inflation period. Inflation — and the rising prices that come with it — are currently affecting the United States. According to the USA Bureau of Labor Statistics, annual inflation had a 41-year peak of 8.5% in March. It dropped down to 8.3% in April but is still higher than market expectations of 8.1%.

Inflation Impacts Purchasing Power

This number may seem small, but it has a great effect on employee salaries. Inflation, at this magnitude, changes the price of how much can be purchased over time. Below, we’ll examine how inflation affects salaries, what software employers should keep in mind before adjusting compensation for inflation, and why it’s crucial to consider the increasing cost of living and adapt your pay plan accordingly.

Is Inflation Really the Grim Reaper?

Inflation sends shivers up and down the spines of economists around the world.

It is one of the most critical concepts of macroeconomics. Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

Regardless of the context, inflation indicates how much the relevant set of goods and/or services has become more expensive over a specified period, most commonly one year. It can be caused by a rise in production costs, such as raw materials and wages, or by an expansion of the money supply.

Inflation’s Wrecks Financial Havoc

Let’s look at 2022’s price increases.

Energy prices increased by more than 30%. Yikes! 

1. It’s now about 50% more expensive for you to go anywhere–-even to that beautiful, satisfying job of yours. For my data lovers, gas prices rose 43.6% in March, and April was worse, increasing 48%. Fuel oil jumped enormously to 80.5% and 70.1%, respectively.
2. Breakfast, lunch, and dinner are all now about 9.4% more expensive for you and the whole family. Probably for your COVID dog too. We’ve seen the largest food price increase since April 1981.

Inflation can have a major impact on salary levels, economic growth, and living standards. While inflation can benefit some sectors of the economy, it can harm others.

It’s All About Purchasing Power Folks

For instance, inflation can erode the purchasing power of sales professionals’ wages in the software industry, leading to higher living costs.

It can also cause businesses to raise their prices, leading to even higher inflation. Inflation is thus a primary concern for central banks and policymakers around the world.

The kind of inflation we are used to, under 2% per year,  is a feature of healthy economic growth. But when inflation is high, employers frequently cut back on raises, perks, and benefits, while workers’ real wages fall.

The Inflation Roller Coaster

The consequence is a vicious cycle of low wages and inflation, which can lead to economic stagnation. Also, as a harmful result of inflation, retirees’ fixed incomes no longer go as far as they once did. Grandma will have to pay more to eat now, and at this pace, she’ll be down to one hotdog a day.

From here, inflation can also destabilize the political system as voters become enraged by the rising cost of living. Therefore, inflation is a problem that both software employers and sales pros should closely monitor.

The Inflation Impact: Business vs. Wages

The economic impact of inflation hits specific industries more than others. Depending on the business, the extent of the damage will vary.

• Erodes the purchasing power of wages and salaries, which reduces the ability of employees to buy goods and services.
• Increases the cost of benefits, such as health insurance and pensions, which raises the cost of doing business.
• Reduces the retention rate and causes labor shortage. As unemployment declines and costs rise, the sensitivity of employees to pay increases. For instance, working parents who cannot afford daycare may decide to leave their job, hence worsening labor shortages.
• Shortages in the supply chain. When demand exceeds supply, firms frequently run out of material or cannot move goods quickly enough to meet demand.
• Increases the raw material cost when suppliers raise prices to ration a limited supply. Sometimes, these cost increases manifest as expedited fees, surcharges, shrinkflation, or contract renegotiation.
• This may lead to higher interest rates, which increase the cost of borrowing and make it more difficult for businesses to scale.
• Creates economic uncertainty, which can lead to slower growth and reduced profits. 

Inflation’s Meager Impact on the Software Industry

Fortunately, the software industry is a service-based rather than a raw materials-based business. 

And software companies can offer their employees flexible schedules or work-from-home opportunities. Therefore, not all of the above points economically impact the software business. And if you’ve been working “remotely,” congratulations, as you have avoided a notable work expense.

While inflation can adversely affect employers, they should not be too quick to react to rising inflation rates. Instead, they should consider how inflation will affect their business before making any decisions.