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Yay, You Got a Raise! Does it Keep Up with Inflation?

Wages can't rise as fast as consumer prices.
by Ara Eugenio
May 26, 2022
Photo/s: Shutterstock
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Data analyst Kim (not his real name) looked forward to his annual pay increase that was promised by his boss in January this year, hoping it would cover the cost of returning to on-site work, until he got his payslip.

The 4% raise, though smaller than expected, initially did not bother him that much as he understood how their company was still trying to bounce back from the pandemic, until a friend told him he deserved more, citing the country's annual inflation of 4.9% as of April.

"'Di ko talaga 'yun naisip at first kasi, mindset ko, at least meron kesa wala, na kahit papano, may pang-transpo ako.' Pero nung nabring up 'yun, nalungkot ako kasi oo nga naman, nagmahal nga mga bagay-bagay. Eh lagi pa naman ako nagti-tip sa taxi simula 'nung sabi sakin ng isang driver gaano kamahal gas. So parang nag-cancel out lang 'din," he told reportr. 

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Annual merit increases are a trusted reward system used by employers to reward performance and make employees more fulfilled at work. A 2021 Willis Towers Watson report found that companies in the Philippines were looking to raise the salary of employees by an average of 5.6% this year as they expect the economy to rebound from the fallout brought by the COVID-19 pandemic. 

But despite the good news this brings, there's also the problem of how inflation diminishes the buying power of wages over time, spelling bad news for both workers and companies.

But first, what is inflation?

"Basically, inflation is nothing but the change in general prices," BDO Unibank chief market strategist and vice president Jonathan Ravelas told reportr. 

Inflation in April accelerated to 4.9%, the highest since January 2019. This means that looking at a basket of goods, the price in April 2022 was 4.9% higher compared to April 2021.

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Price hikes for food and non-alcoholic beverages (3.8%), transport (13%), and housing, water, electricity, gas, and other fuels (6.9%) drove inflation higher for the month, government data showed.

"Inflation is actually a good gauge that the Central Bank uses to talk about business conditions," adds Ravelas, noting that a "stable inflation" is between 2% to 4% as within this range, businesses are given a room for "predictability" when doing business.

Inflation also influences interest rates, he explained further, adding that when inflation is high, interest rates are likely to follow. When this happens, people eventually start spending less and the demand for goods and services falls, which will make it harder for companies to raise prices, lowering inflation.

Since the current rate had breached the range of what counts as stable, the Central Bank in May raised the key policy interest rate by 25 basis points to 2.25% to slow inflation down. 

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"They’re like twin sisters. 'Pag tumaas 'yung inflation, tataas 'yung interest rates. 'Pag bumaba 'yung inflation, bababa rin 'yung interest rates. So you want a stable inflation so people can do the right business," he added, explaining how when this happens, employers are given more room to raise wages.

How inflation affects wages

In the Salary Budget Planning Report made by Willis Towers Watson, companies in the Philippines are said to be looking to hike, if they hadn't already, the salaries of employees, notwithstanding challenges of hiring new workers and retaining the current workforce.

During the pandemic, during which the Philippines fell into its deepest recession post-war, retained workers suffered the burden of shouldering their left-behind workload, driving more and more people burned out. It only makes sense for employers to raise their wages, as apart from the additional labor, prices of goods had continued to rise. 

But the challenge now is this, much as companies want their workers satisfied by keeping them well-compensated, as of now "not all businesses are able to afford increasing salaries", said Ravelas.

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Let's say for example, Kim's monthly pay without taxes in April 2021 was at P30,000 per month, P10,000 of which is alloted to groceries. Now that he got a 4% raise a year later, bringing his monthly take home to P31,200, one would say he has more room for spending. However, given a 4.9% inflation, his budget for groceries actually have less buying power at P490 less. 

Essentially, he may be earning more, but he has to compensate and pay more for groceries if he were to buy the same stuff he was buying the year before. This why employees should demand a raise that is able to keep up with the inflation rate, if they were to at least maintain the level of purchasing power they have.

But again, while companies have expressed willingness to raise wages, they will likely have a hard time making this consistent with inflation, as the economy after all, is still battling a period of uncertainty.

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"How can businesses cope when demand is still improving? Kumbaga 'yung business conditions mo nagrerecover, so mahirap in general 'yung pagraise ng mga sweldo. If a business really wants to please its workers, the impact of raising wages usually falls on consumers kasi sa kanila kinukuha usually 'yung pambayad sa mga tao,Ravelas said. 

"Basically, the key factor there really is how can business keep their costs low to be able to afford giving their employees a raise while also keeping things afloat given the existing business environment," he added. 

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