CPI, Inflation and Pay Increases
Written by David Simpson, Founder and Managing Director at Melbourne HR
As the end of financial year rolls around, you may get queries and concerns from staff regarding inflation and CPI (Consumer Price Index), particularly if you are engaging in remuneration discussions like pay rises.
To ensure you are on the front foot, we’ve pulled together a quick ‘cheat-sheet’ with the facts and details you need to know, including:
Definitions
How inflation and CPI interact
What this means for pay rises
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Definitions
Inflation:
The rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices, or the increase in the cost of living in a country. (IMF)
CPI (Consumer Price Index):
The simplest way of thinking about the CPI is to imagine a basket of goods and services typically acquired by Australian households. As prices vary, the total price of this basket will also vary. The CPI is simply a measure of the changes in the price of this basket, as the prices of items in it change. (ABS)
How do they interact?
Inflation is a measure of price increases across the whole economy, or one component of the economy. Whereas CPI is the measure of inflation on a specific 'basket of goods' that is representative of the average Australians monthly expenditure. So, in simple terms CPI is a more practicable measure of how everyday expenses are changing for the average Australian.
Why is this important for pay rises?
CPI for the last 12 months (April 21 - Mar 22) has been 5.1%, which means on average your employee’s personal expenses have increased 5.1% over the last year. If you have not administered any pay increases over this same period, then your staff’s remuneration does not buy as much as it used to.
This is called 'falling real wages' or 'real wage shrinkage'. It means that your wages are no longer as 'good' as they used to be.
News about inflation and real wage shrinkage has been ever-present across major media outlets over the past few months, and your staff will have no-doubt seen this. Whilst they may not fully understand the interaction between these economic forces, one message most realise is ‘everything is more expensive, and your money will stretch thinner’.
And the proof is there every time they pay for petrol or visit the supermarket checkout.
“This is called ‘falling real wages’ or ‘real wage shrinkage’. It means that your wages are no longer as ‘good’ as they used to be. ”
What do I do with this information?
As you begin having remuneration discussions with your staff, it’s important to understand this topic might arise. As a business, you need to have a clear line of response.
As a simple example, you may say that ‘commercial imperatives don’t allow for a CPI increase across the board, but we will reassess next year’.
Or, if you are thinking of providing CPI, then you might say to staff that ‘given we are providing CPI across the board, and this (5.1%) is significant, we are not in a position to offer more than that for most staff. Exceptions will be made for promoted staff.'
Whatever your take, it is important to have a consistent stance on the matter and ensure you are prepared for any potential questions or concerns.
With the end of financial year comes some delicate conversations regarding remuneration and pay rises. Stay on the front foot and ensure you understand how the economy could influence your remuneration strategy.
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David Simpson is the Founder and Managing Director at Melbourne HR.
Edited by Nicole Torrington, Marketing Manager at Melbourne HR.
