What is inflation?

Inflation is a measure that refers to the rate of increase in prices over a given period. The Consumer Price Index (CPI) is an index available for the U.S. and other geographic areas that measures the average rate over time for major categories of consumer goods and services.

A rise in prices is usually expressed as a percentage and represents how much more expensive broad or specific goods and services have become over the given period. This can be translated as the decline of purchasing power as currency buys less than it did previously.

Current inflation conditions

The Bureau of Labor Statistics reported that consumer prices rose 9.1% over a year as of June 2022, marking the highest levels of inflation since 1982. As of July 2022, the CPI reports the following inflation rates across major consumer categories:

• All items: 8.5%
• Food: 10.9%
• Energy: 32.9%
• Transportation services: 9.2%
• Shelter: 5.7%
• Medical services: 5.1%

How does inflation affect retention and recruiting?

Purchasing power

Sharp rises in inflation mean that your employees are paying a higher cost of living, but fixed income or wage increases less than the inflation rate decreases their overall purchase power.

For example, a $50,000 salary in 2020 is equivalent to approximately $57,000 in 2022 when accounting for inflation rates. An employee who hasn’t had a significant pay increase will have roughly $7,000 less in buying power than they did in 2020 as the inflation rate remains high. As such, compensation is effectively lower than it was before 2020.

Although the CPI is reporting the highest rates in decades, inflation doesn’t necessarily affect every worker to the same degree. For instance, lower-income workers tend to feel the effects of inflation more strongly since they often spend a greater proportion of their income on living essentials such as housing, food and energy.

Salary expectations

Annual compensation reviews and raises have historically been acceptable within the context of normal inflation rates, but the volatile economic climate and low unemployment rates may shift typical compensation expectations for your business.

The unemployment rate at 3.5% as of July 2022 combined with high inflation and widespread job growth gives employees more power over compensation expectations. Most businesses project a 3.4% average salary increase for employees, less than half the inflation rate, and the majority of workers are seeing inflation outpace their salary increases.

As such, employees are more likely to make decisions about their jobs based on compensation packages. About 56% of workers report they would leave their employer if another offered a higher salary, indicating that insufficient pay and benefits are key drivers in high turnover and recruiting challenges. Small businesses and industries with low margins may especially struggle to meet salary expectations and recruit or retain employees from a reduced labor force.

Inflation strategies for retention and hiring

As inflation raises expectations that job candidates and employees have for compensation, you may need to adjust salaries or find other strategies for hiring and retaining employees. Below, you’ll find various ways to strengthen your workforce during high inflation.

Salary increases

Many workers expect higher salaries, but increasing wages can present a few challenges. Although businesses should continue with annual raises and reviews, they may not have the salary budget to accommodate for inflation. Matching pay raises to high inflation may help retain employees short-term but can permanently affect your fixed costs and hurt your bottom line when inflation eventually levels out to normal rates.

Increasing wages too much can also create a wage-price spiral, where workers expect prices to rise and request equivalent pay increases to maintain their purchasing power. In response, employers may need to increase the prices of goods and services, driving inflation and subsequently raising salary expectations even higher. Level pay raises may cause some employees to leave for other companies but can help maintain stable fixed costs long-term without contributing to hyperinflation.

Bonuses

Many employers use bonuses to cover temporary gaps between inflation and pay raises without locking in fixed costs for the future, and the appropriate balance between bonuses and raises can help maintain recruitment and retention along with positive bottom lines.

Bonuses are a variable cost that can be used to boost morale and incentivize and reward performance. If funds or conditions are challenging, bonuses can be temporarily reduced or eliminated and provide much greater flexibility than permanent pay increases.

Rewarding employees for peak sales or production can help incentivize performance, promote loyalty and increase profits, but some bonuses can directly target recruitment and retention. Consider implementing bonuses for employee referral programs or work anniversaries. Bonuses can also take a variety of forms, including:

• Base pay bonus
• Commission
• Profit-sharing
• Company shares and stocks
• Extra paid leave

Health benefits

Workers expect group health insurance as part of their compensation packages, but only 49% of small businesses offer coverage. Businesses are also increasingly providing more wellness initiatives, such as mental health or nutrition programs. Reports show that employees who are satisfied with health and wellness benefits are 1.6x more likely to stay at their current organization.

Retirement benefits

Regardless of inflation rates, you can help your employees save money for retirement with a company-sponsored retirement program. Retirement savings in investment accounts can help employees hedge against inflation long-term and provide tax advantages. Since these benefits can compound the longer an employee stays with your company, retirement programs can help encourage retention and attract new candidates. Studies show that 77% of employees consider retirement benefits extremely important in their decision to leave a current employer.

Perks

In a competitive job market, an attractive set of perks can help keep employees satisfied and productive, promoting company loyalty and long-term return on investment. Perks can also aid recruitment efforts by distinguishing your job offer from another company with similar financial compensation packages. For example, workers regard companies such as Squarespace and Airbnb as some of the best places to work since they offer employees a range of attractive perks. These can include:

• Flexible work schedules: Workers are increasingly expecting remote or hybrid work options as well as flexible hours.
• Paid leave: Employees often see paid vacation, parental or other types of leave as a competitive edge.
• Free or subsidized meals: Many companies cover employee snacks and lunches with in-house cafeterias or meal allowances.
• Professional development: Facilitating training or education for employees can help them develop professional skills and promote company loyalty.

Read more: Employee Benefits: Types of Perks to Offer Employees

Company culture and brand

Company culture refers to the attitudes, beliefs and behaviors that make up the social dynamic in a workplace, and brand refers to your company’s mission and vision. With increased attention to healthy workplace cultures and socially conscious brands, both are important decision factors for current and prospective employees in the workforce. For example, recent surveys show that 88% of employees believe businesses shouldn’t profit at the expense of society, and 95% believe businesses should benefit all stakeholders, including employees.

Read more: What Matters Most, Culture or Compensation?