- What is inflation?
- What creates inflation?
- How does inflation affect you?
- Why salaries and wages don't keep up with inflation?
- How does a salary increase reduce the impact of inflation?
WHAT IS INFLATION?
The rate of increase in price is called inflation. High prices erode the purchasing power of money.
According to PSA, the Philippines' headline inflation increased to 8.1 per cent in December 2022, from 8.0 per cent in November 2022.
WHAT CREATES INFLATION?
The Russian invasion of Ukraine disrupted the global supply chain of commodities resulting in the increase in the price of food products, fertilisers, fuel, and energy including freight charges accelerating global price growth which were transmitted from country to country by trade.
The high oil prices raised production costs and passed over to consumers at the pump, in our gas, electricity bills, transport, food and other goods and services.
HOW DOES INFLATION AFFECT YOU?
The 8.1 per cent inflation has a different impact on everyone.
Your personal inflation might differ from the market basket that is calculated by the country's economists to reflect the average spending of Filipino households.
So, what is your personal inflation rate?
The answer is 2 questions:
Where do you spend your money on?
What is inside your market basket?
If a big chunk of your income goes to fuel, medicine and food, for which the average price has risen faster than other items, your personal inflation will likely be higher than the inflation rate.
On the other hand, for a person without dependents who works from home and whose basket is mostly items that are produced locally for which the average price has risen slowly the personal inflation rate will be lower than the inflation rate.
A household with multiple incomes might be able to manage the rising prices but not a single-income household with growing children in school and with caring responsibilities to their elderly parents who either take public transport or drive a car and goes for regular medical check-up. Most likely these families will feel the full weight of rising prices if the bulk of their salary goes to food, fuel and medicine.
HOW DOES INFLATION AFFECT YOUR SAVINGS IN THE BANK?
The savings rate in the Philippines is between 0.20 per cent and 1.20 per cent.
If you’ve been keeping your funds for long-term goals like retirement in the bank. Do the maths, please!
0.20 per cent less 8.1 per cent equals negative - 7.9 per cent.
1.20 per cent less 8.1 is equal to - 6.9 per cent.
That is how much LESS you can buy when you take your money out after a year.
You are losing the retirement savings that you placed in the bank to inflation.
INFLATION AND HOUSING
If you rent, anything associated with fuel and energy will affect you.
If you have a mortgage, a rising interest rate will increase your mortgage payment if you have a variable interest rate.
However, you will benefit from the rising interest if your mortgage is fixed.
INFLATION AND HEALTHCARE
Rising cost is correlated to out-of-pocket medical expenses. If you do not have insurance or HMO and take maintenance drugs, rising check-ups and medicine costs hurt.
INFLATION AND TRANSPORT
If you work from home and buy your groceries and shop online, your transport cost might be less than individuals who work on-site every day where they need to travel or drive from their house to work and back home. The distance can hurt them with the high demand for petrol plus toll fees and lunch.
INFLATION AND FOOD
Groceries and supermarket food purchases have gone up. So even if you cook food at home and bring lunch to work, you can’t escape the rising cost but it’s relatively cheaper to bring lunch to work.
WHY SALARIES AND WAGES DON'T KEEP UP WITH INFLATION?
Because salaries and wages are sticky.
This is a basic labour economic principle that says employers do not respond as quickly to changes in the economy.
In a high inflationary period, it means that salaries and wages do not increase or decrease with rising or lower prices.
Why do salaries and wages remain unchanged?
First, the employment contract does not state any decrease in salary if the economy falls into a recession.
But most likely you will receive a raise in return for your contribution to productivity and profit or good performance.
The second explanation is psychological and moral.
Companies will restrain any pay cut because of the psychological and moral repercussions to employees.
Unlike goods and services where you can buy small quantities or take substitute items if the price increases, you cannot do that with people.
The third reason is the law.
Salaries and wages are bound by law or statutory contracts. There is a legal minimum wage contract that companies comply with so they cannot just decrease your salaries and wages arbitrarily.
In the short term, salaries and wages may tend to be fixed but can be flexible and negotiable in the long term.
The fourth reason is trade unions.
Trade unions advocate the protection of employees and will not accept a decrease but will most likely propose a wage increase.
Therefore, salaries and wages do not keep up with inflation because it is a management decision and prerogative. The input that drives salary increases is less about the economy and more about the management. Management decides whether they will raise their employees’ salaries.
However, if prices keep rising for too long without any effective measures to arrest the rising prices, employees will demand an increase in salaries and wages or switch jobs.
HOW DOES A SALARY INCREASE LESSEN THE IMPACT OF INFLATION?
Let’s say you receive a salary increase of 5 per cent, good for you!
Although nominally you receive a salary increase of 5 per cent, an 8.1 per cent inflation will just eat up your salary increase and chew up an additional per cent off your salary.
In effect, your salary increase will just replace some of the loss in the real value of your salary.
But, it’s better than not having any increase at all.
Inflation hurts especially the low-income group and if you did not receive a raise prior to the Russian and Ukraine Wars or even before the pandemic.
Fixed-income earners, pensioners, savers, and those with medical needs are sensitive to price increases.
See the How to Hit back at Inflation