- What is inflation?
- Causes of Inflation: Unraveling the Global Supply Chain Impact
- Inflation's Ripple Effect on Your Finances
- Personalized Impact of Inflation: Your Basket, Your Reality
- Why do Salaries Lag behind Inflation?
- Mitigating the Impact: Understanding Salary Increases
What is inflation?
The rate of price increase is called inflation. High prices erode the purchasing power of money. The recent data from the Philippine Statistics Authority (PSA) reveals a headline inflation spike to 8.1% in December 2022, compared to 8.0% in November 2022.
Causes of Inflation: Unraveling the Global Supply Chain Impact
Global events, such as the Russian invasion of Ukraine, have disrupted the supply chain, leading to increased prices of essential commodities. The surge in food, fuel, energy, and freight charges has triggered a domino effect on global price growth, affecting countries worldwide.
Personalized Impact of Inflation: Your Basket, Your Reality
Individuals experience inflation differently based on their spending habits. The personal inflation rate depends on where you allocate your income and the contents of your market basket. For instance, those spending a significant portion on fuel, medicine, and food may experience a higher personal inflation rate than the general inflation rate.
Inflation's Ripple Effect on Your Finances
Savings Erosion: With the Philippines' savings rate ranging from 0.20% to 1.20%, the real value of your long-term savings for goals like retirement diminishes when subtracting inflation. A stark reality emerges as your purchasing power decreases.
Housing Implications: Renters and homeowners with variable interest rates may face increased costs due to inflation. However, those with fixed-rate mortgages can benefit from a stable interest rate.
Healthcare Challenges: Rising medical expenses, especially for those without insurance or HMO coverage, impact out-of-pocket costs. Increased check-ups and medication costs create additional financial strain.
Transportation Expenses: Remote workers may experience lower transport costs compared to those commuting daily. High demand for petrol, toll fees, and lunch expenses can significantly affect daily commuters.
Grocery Bills: Inflationary pressures contribute to higher grocery and supermarket prices. Despite cooking at home, individuals cannot escape the overall rise in food costs.
Why do Salaries Lag Behind Inflation?
Salaries and wages often fail to keep pace with inflation due to various factors:
Sticky Nature: Labour economic principles highlight the inertia of salaries during economic fluctuations.
Psychological and Moral Implications: Companies avoid pay cuts due to the psychological and moral impact on 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.
Legal Constraints: Statutory contracts and minimum wage laws prevent arbitrary decreases in salaries and wages.
Trade Union Influence: Trade unions advocate for employee protection, resisting pay cuts and often proposing wage increases.
The apparent disconnect between salaries and inflation arises primarily from management decisions and prerogatives. The driving force behind salary increases is less tied up to economic shifts and more intricately linked to managerial choices.
Should prices persistently rise without intervention, employees may seek salary increases or explore alternative employment options. This underscores the importance of proactive measures for maintaining equitable compensation in the face of prolonged inflationary pressures.
Mitigating the Impact: Understanding Salary Increases
While a salary increase can serve as a buffer against the impact of inflation, its efficacy may fall short.
For example, a 5% salary increase may prove insufficient in offsetting the impact of an 8.1% inflation rate.
Nonetheless, any incremental increase contributes to alleviating the real value loss in income, offering a measure of relief, particularly for vulnerable demographics such as fixed-income earners, pensioners, savers, and individuals with medical needs.
The content and information accessible on SELFMATTERS are presented solely for informational and educational purposes and should not be construed as financial advice. It is strongly recommended that individuals seek guidance from an independent financial advisor regarding their specific circumstances.
