Will Inflation Impact Pay Raises?

• Wages are increasing much slower than inflation.  
• Workers in all sectors are demanding pay raises at high rates, and many companies are obliging. 
• Hence, inflation’s effect on wage increases is proliferating them, not slowing them down. As a result, wages have already risen in almost all sectors. 

Inflation is the highest it’s been since 1981, and the prices of everyday items have increased considerably. So naturally, employees desire increased wages to pay for these items. In many cases, workers will be unable to purchase basic necessities without an increase in wages.  

According to a survey of 5000 U.S. workers conducted by Grant Thornton LLP, 40% of workers expect pay raises more significant than 6% this year, 31% expect a rise of more than 8%, and 21% expect a raise of more than 10%.  

Salaries, however, tend not to keep up pace with inflation. As a result, wages are generally static for most jobs. Companies keep salaries fixed and only make changes with long-term considerations in mind – such as the inability to reduce wages during market failure.  

Nonetheless, workers are increasingly exercising the option to find work that pays more. 40% of workers say they left their job because they found a different one that paid more.  

Inflation and wages 

Inflation began to rise in April 2021, which was around the time the Great Resignation became recognized as a phenomenon in the media. So the Great Resignation has ultimately been the driving force for increased starting salaries across the board, not inflation.  

What effect does the increase in salaries have on inflation then? Intuitively, it seems like it can’t be a coincidence that inflation has accompanied the events of millions of people leaving their jobs and rising salaries in response. Rises in wages are not in response to inflation but are meant to attract workers.  

Inflation is undoubtedly related to these factors, but the leading causes of the increases in price and shortages of essential goods are “supply chain disruptions, rising energy prices, and unanticipated jumps in demand causing supplies of various inputs to fall short.”  

This is not to say, however, that wage increases do not affect the inflation rate. Service demands and an inability to find workers causes employers to raise wages to attract workers. To cover these costs increases the prices of goods and services.   

When this occurs at a widespread pace, everyone loses because costs are going up, making the increase in salaries negligible for employees’ purchasing power. Inflation will continue to go up in the near term in service industries, and it is beginning to go down in goods industries.  

Will pay raises continue to rise with inflation?  

Pay raises contribute to inflationary pressure but are not the primary cause. As it stands, wages are increasing much slower than inflation. Workers might be making more money, but they cannot do as much with that money due to the increased cost of everything.  

Workers in all sectors are demanding pay raises at high rates, and many companies are obliging. Hence, inflation’s effect on wage increases is proliferating them, not slowing them down. As a result, wages have already risen in almost all sectors.   

According to Deloitte, employers will likely look to implement artificial intelligence to offset some of the labor costs and price increases. But, in the meantime, almost all reports say this will further contribute to increases in inflation.  

In short, inflation is impacting wages, and wages are moving inflation. As a result, workers are demanding higher salaries and are, in many cases, actually receiving them. This expectation leads employers to cut costs driving up the price of goods and services.  

Keeping in mind that this is but one contributor and relation to inflation among many, what will resolve this crisis is a complex question for economists, whose opinion varies widely and often along partisan lines.  

What is clear is that this mess’s end is not coming anytime soon. Inflation and its consequent price increases could last well over two years. Moreover, infrastructural changes due to the pandemic and the war in Ukraine are likewise factors that will very likely slow down the process of inflation resolving itself.  

Nonetheless, the economy has recovered substantially with a reasonable labor force participation rate (66%) and a low unemployment rate (3.6%) which is the hallmark of a robust economy.  

This does not mean that people are not struggling; depending on your job and salary, you will experience inflation in vastly different ways. What it does mean is that inflation will not last. Instead, it will dissipate in ways we do not yet understand.