How the pressure of inflation affects your salary

How the pressure of inflation affects your salary

Inflation can be considered good or bad, depending on your circumstances and viewpoint. Economists, governments, and employers have their views, but what about you earning an annual salary as an employee?

Here we look at how the pressure of inflation affects your salary. We define rising inflation and the consumer price index. We also discuss how wage growth and rising prices affect your financial wellbeing. We complete our exploration on the topic with tips on negotiating your next pay raise.

What is inflation?

Inflation and the Economy

Inflation is a term economists use to describe the rate at which prices rise on goods and services. When costs rise, inflation exists; if consumer prices were to fall, then deflation would exist.

When inflation rises, it affects many things, including workers and employers. To understand inflation and its effects, we need to view it from both perspectives.

How inflation affects workers

High inflation erodes the real value of your salary (real wages), if your salary raise does not keep up. For example, with higher inflation, the prices of goods and services may go up by 10%. If your salary raise is only 6%, you are less well off, and your spending power is less.

Furthermore, if the interest rates on your savings account are less than inflation, the real value of your savings is falling. The same is true for individual investors, depleting the real returns of any investment (not that we are suggesting that you should not make investments or build the balance of your savings).

Higher prices also create a rising cost of living through higher new borrowing fees, on debts such as loans, mortgages, and credit cards. If market conditions and upward pressure on interest rates exceed wage increases, homeowners can experience significant financial woes in the year ahead.

However, rising inflation can be good for workers who have older loans or mortgages.

Consider this example; ten years ago, you had a salary of £1,000 per month, and your monthly mortgage payment was £600, leaving you with £400. Today, you enjoy higher wages of £1,500 per month, but your mortgage is still only £600, leaving you with £900.

As you can see, you have more than twice the money left over. Of course, inflationary pressures mean your grocery bill is higher today. However, ten years ago, your mortgage took 60% of your salary. Today, your mortgage only takes 40% of your wages. So, despite the rate of inflation, there is good news if you look from the right perspective.

Another factor that pushes salaries higher is a significant increase in the UK National Minimum Wage. You can read more about the National Minimum Wage growth here. For 2023, the employers must increase salaries for those on minimum wage by 9.7%, which will create a positive employee experience for the lowest-paid workers.

How inflation affects employers and salary budgets

The broader picture becomes even more fascinating when we consider how inflation affects employers, because high inflation can lower unemployment.

For example, as inflation takes hold, companies are charging more for their products and services. However, wage inflation (your pay raise) tends to be ‘sticky’ and lags behind the inflation rates. If inflation rose in the past year by 10.5% and your pay raise and base salary increases by 6.4%, your company is making better profits.

So, how does this lower unemployment? With profits rising faster than wages, employers have more money to spend on hiring new staff. More of the population becomes employed, and unemployment drops.

What happens next is even more interesting! With fewer people looking for jobs, employers experience a skills shortage. Candidates are put in an enviable position, as recruiters fight to hire them. Employers offer candidates higher hourly wages, using higher wages to encourage them to accept their job offer.

As workers pay increases and they begin to enjoy a better money supply, their purchasing power increases and they begin to spend more. The economy then experiences what is called ‘wage push inflation’ as companies respond and begin to charge more for their goods.

As we make an analysis of the data laid out here, it becomes apparent that the effects are cyclic, and we end up back where our story began.

Rising prices and the consumer price index

Consumer Price Index

The UK consumer price index is the weighted average increase in the price of goods. You can think of the CPI as the average cost of a shopping basket, which includes food, transportation, clothing, medical care, housing, communication, and education.

The CPI is used to make comparisons and calculations, such as the cost of living. The costs included in the CPI are intended to be those that the average person buys. However, the effects are not felt equally throughout the population.

For example, if the price of petrol has risen sharply, workers who own a car are affected more. Workers who commute on foot or cycle to work, would see their earnings affected less than what the CPI suggests.

Factors that are causing prices to rise today include:

1. Supply chain issues during post-pandemic recovery and a shortage of lorry drivers.

2. Higher customs and duty taxes as a result of Brexit.

3. A shortage of UK gas, caused by the conflict between Russia and Ukraine, forcing energy providers to buy from Europe and further a field at a higher price.

Tips on negotiating your next pay raise

Workers are in a fantastic position for negotiating a higher salary. In the UK, there are more open positions than candidates seeking work.

Companies will be keen to hold onto the workers and skills base they have. They will also be prepared to offer a higher starting salary, as hiring managers compete for people out of work, or attempt to entice them away from their current employer.

So, whether you are staying with your current employer is looking for a new job opportunity, you are in a position where you can demand higher earnings.

If you are seeking wage growth, we recommend reading our guide How To Ask For A Pay Rise. Our top tips include:

1. Do your research and investigate your industry’s salary trends. Your research and analysis should consist of uncovering the average salary for your job, and the upper end of employee earnings.

2. Build your case for companies to make an investment in you and raise wages. Consider your achievements, awards, recognition, and past performance. Also, paint a picture of how your future performance will benefit your employer.

3. Look beyond your base salary. A high fixed income is nice to have, but other benefits and perks are just as, or more valuable, to your financial health and mental wellbeing. Commission or a company car is great for high performers, whereas other workers may appreciate more paid time off, flexible working hours, working from home, or better maternity or paternity benefits.

4. Practice your pitch. Discussing the cost of your salary can be intense and for some people, the future prospect of such a discussion is terrifying. Whether you are too confident or too shy, practice your pitch and if you have a trusted friend or mentor, get their feedback.

5. Update your CV. Your CV is a must-have when applying for jobs and a good to have when preparing for salary discussions as a whole. If the right things appear on your CV, you are sure to capture the interest of recruiters and make a case for their investment in you. You can start with a CV template and take the time to review the role’s job description. Here you will find the skills, traits, and abilities the company values, and these should become a priority on your CV.

Career advice

Career Advice

For further career advice and help writing your CV, explore these insightful articles:

FAQs

Next, we answer the most frequently asked questions on inflation, prices, higher interest rates, and global economy growth.

How does inflation impact salary?

If the growth of inflation exceeds the growth of your salary, the costs of living and prices are rising faster than your wage. When a business’s wage bill drops, it has spare cash to increase its workforce. As employment drops, there is a rise in demand for skilled workers, and companies begin to offer higher salaries to attract the talent they need.

How does inflation affect wage and salary earners?

High inflation can leave you worse off as costs for goods and services rise. It can be bad news for investors and people who have savings, as they earn interest at a lower rate in comparison to inflation.

However, if this is to happen, your loan and mortgage payments still demand a lower percentage of your earnings, so it does not necessarily mean you will find yourself in a financial crisis.

Do salaries go up with inflation?

Yes. Salaries do go up with inflation, although they may lag behind. You may be able to negotiate a better salary with your current employer. Some professionals move to a new job that offers a higher salary, or retrain, learning new skills to make a career change.


About the Author: Daniel Aldridge

Daniel is driven by the conviction that comprehensive salary data should be accessible to everyone, ensuring empowered and informed career decisions at every stage. From fresh graduates to those contemplating a job switch or relocation, Daniel advocates for arming individuals with this vital knowledge to foster smarter choices.



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