What is unsaid can resonate more loudly than what is shouted. The silence about inflation today makes my ears ring. Inflation has been the bane of compensation people, frequently used as a one-way ratchet mechanism to jack wages higher. Things seem to have changed now. No one is talking about it.
Those who like to pound the inflation drum must be embarrassed. Not much to rage about when inflation stays flat or (gasp!) even declines as it has in some months. If inflation is a rising tide that raises all boats, the tide has fallen but the boats have not moved. That fits Brennan’s Law on Cost of Living:
- When the cost of living goes up, people expect pay to go up.
- When the cost of living goes down, people expect pay to stay up.
- People always expect pay to increase.
Perhaps “no inflation” is not news because people generally give their greatest attention to local economic changes. Most inflation measures are national rather than regional or urban, so they might not match your neighborhood reality. Global economic inflation patterns are more distant and even less likely to be noticed. Besides, different countries have highly variable inflation rates; and people care most about price changes that affect them directly. Personal spending occurs not where you work but where you live … yet folks expect their workplace to deliver income sufficient to maintain and steadily improve their home lifestyle. That implies regular pay increases that “keep you whole” (to use the ubiquitous phrase always found in labor negotiations).
Although union organizers and demagogues of all types cry out loudly demanding equity and fairness when inflation rises, those same voices grow mute when it falls. The loss of that handy excuse as a club with which to beat employers is probably quite distressing to some people, but they are presently discreetly quiet about it. The implications are dramatic. If a jump in the Consumer Price Index means buying power has been eroded, doesn’t a CPI drop suggest the opposite ... that workers now get more for the same amount of money? COLA formulas depend on increases in index figures to generate positive numbers. A lack of inflation undercuts the logic for building such undependable automatic increase mechanisms into pay programs. This is an important topic.
Why is no attention being given to low or negative inflation? I can’t be sure if society is too polite to mention that official inflation rates are pitifully low or if the media is merely averting its eyes from a topic people don’t want to hear about. Perhaps the message that pay should not be tied to an uncontrollable theoretical relative economic measure is an unpopular one. Whatever the reason for public indifference, we compensation people must be aware of the facts and their meanings. The value of money is central to our profession.
When pay only ratchets upwards and never adjusts downward, great problems can emerge. In times of flat or negative inflation such in 2009 and this current year of 2015, pay increases still are granted, even if small. Employee base income amounts continue to grow. When a new inflation index in the future finally produces a positive change in the absolute market-basket item cost measures (which do NOT include pay), it will show big relative increase percentages: i.e., going from –2 to +1 is a larger relative change than moving from 6 to 10. Ratios are deceptive.
Even tiny growth in absolute prices in major cities will produce big index change percentage jumps in the future. Despite getting pay raises while inflation was negative in the past, people will then scream that pay must again increase “to catch up” with inflation … after a long period when pay was not frozen or cut in line with contemporaneous CPI movements. Very few enterprises have adjusted pay downwards as inflation waned and even fell, so the economic effects of such imbalances could be severe.
What should be done for a future when inflation again becomes a payroll pressure factor? How will we respond to those anticipated demands? The time to think about it is now, when things are so quiet.
E. James (Jim) Brennan is an independent consultant with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. After HR corporate jobs in chemical/pharmaceutical manufacturing, he consulted at retail, government, energy, IT, tax-exempt and other industries throughout North America before becoming Senior Associate of pay survey software publisher ERI until 2015. A prolific writer (author of the Performance Management Workbook) and speaker, he gave expert witness testimony in many reasonable executive compensation cases both for and against the Internal Revenue Service. Jim also serves on the Advisory Board of the Compensation and Benefits Review.
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