Salary increases and the cost of living 

Flick on your television, scroll through your newsfeed or turn on the radio: you’ll be greeted with economic projections that are nothing short of depressing. You likely hear the word inflation ten times a day, the sheer mention of ‘cost of living’ sends shivers down your bank balance spine, and any talk of fuel prices is enough to make you think about switching your car for a road bike. 

 

We’re living in sobering times, that’s for sure. But is there more to it than that? Are we really doomed? Are things really all that bleak? And should companies be offering higher salaries to help their employees deal with the rising cost of living? 

 

Well. There are a few things to think about, and things aren’t quite as black and white as the mainstream media will have us believe. So today we’re going to take a birds-eye look at salary increases, the rising cost of living and how we can deal with inflation head-on, so we can get back to some sort of normality! Let’s take a look. 

 

The cost of living goes up in 2022 

 

The data tells us that as of June 2022, consumer prices are up 9.4% from a year earlier, and although it doesn’t help the situation, it’s helpful to learn why this is happening. 

 

Skyrocketing oil and gas prices have seen energy bills go through the roof as energy companies pass on the increases to their customers. The war in Ukraine has contributed to a sharp increase in petrol and diesel prices, which have recently reached record highs. Food and drink prices rose 8.7% in the year (May 2021 – May 2022), whilst the Bank of England increased interest rates from 1.25% to 1.75% just this month. 

 

It’s a lot to take in, but when you look at each individual contributing factor mentioned above, it gives us a good idea of why prices are rising so sharply. 

 

 

Are salary increases keeping up with inflation? 

 

The short answer is no. They’re heading in the same direction, but inflation is outpacing salary increases by over double. Employers aren’t used to factoring inflation into the salary increases they offer, and even though we’ve just seen the biggest salary increase since 1992, it’s still not on par with the rising costs of living. 

 

Naturally, there’s been a big wave of employees lobbying to see an even greater increase in salaries. Below, we’ll talk about whether that’s the right route to take, or if there are other options which might see us benefit more in the long term. 

 

Should employers be paying more? 

 

It’s easy to say yes and move on. We mean, who doesn’t need a bit of extra cash during these turbulent times? It’s also easy to pigeonhole the big companies as greedy cash-gobblers whose only interest is their bottom line – without a care in the world for us mere mortals. There is a question we should ask ourselves, though: is paying employees more money.. the smart thing to do? 

 

A potentially unpopular opinion is incoming: salaries shouldn’t be increased to combat the rise in living costs. 

 

Bear with us here, because we’re not saying compensation shouldn’t be increased, and we’re not saying employers shouldn’t offer more benefits to new recruits. What we are saying is that it should come in another form, rather than an increase in employees’ annual salary. 

 

Why higher annual salaries is a temporary solution with permanent repercussions

 

Just as you and I budget at home, businesses have to budget in the workplace. Each year, they have a ‘salary pool’ which covers employee wages. If the business is having a great year, that pool may increase more than usual next year to reward employees, and vice versa – if they’ve had a rocky year (as we’ve seen during Covid) the salary pool is likely to shrink. 

 

Something worth bearing in mind is inflationary spirals: if every business in the country increases wages, they’ll look to claw that money back through the cost of goods sold. In other words, they’ll charge their customers more because the cost of doing business has increased. What does that mean? The cost of goods goes up across the board, and we’re back to square one. Sure, you’re earning more – but the increase in wages could mean prices shoot up even further, so your newfound cash has less buying power. Alas, nobody benefits. 

 

Seeing as inflation spikes are often temporary, and inevitably steady after an initial rise, wouldn’t it make more sense to keep the cost of goods as low as possible, whilst still boosting the compensation package for employees, but in a more creative, mutually-beneficial way? Let’s look at that now. 

 

Higher compensation – in a different way 

 

Enter: bonuses. Take this report from the Government website as an example. Growth in total pay between February and April 2022 was 0.4%, but for the year, ‘regular pay’ actually declined. If we translate that into words that aren’t so confusing, what it means is you can still see an increase in your pay (via bonuses), even if annual salaries aren’t increasing. The good news is – as we mentioned above – annual salaries are increasing.. they just don’t have to match inflation for employees to see the benefits. 

 

By going down this route companies are able to keep the cost of their products stable, and help steady inflation all the while giving their employees a much-needed increase in earnings. 

What are your thoughts? 

We’ve had a look at the rising cost of living and what’s causing the crazy price increases we’ve been seeing. We’ve also tried to present a different method of helping employees deal with inflation, and explained why a higher annual salary might not be the smartest move to make. 

What do you think? Is a higher annual salary still the best way to go? Or can you see why it could make sense to think about higher bonuses and other benefits to help combat the rising cost of living? Let us know your thoughts.