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Soaring inflation leaves employers with tough choices

Home Business Management Finance & Investment Soaring inflation leaves employers with tough choices

BUSINESSES have already planned pay increases for this financial year and have some tough decisions ahead of them, according Yolanda Sedlmaier, Chartered Reward Specialist at the South African Reward Association.

This is due to rocketing inflation, fuelled by global economic turbulence and local conditions, which are only expected to worsen over the rest of the year. Employees faced with the escalating cost of living may be demotivated by increases falling well-below their needs. Unfortunately, this can negatively affect their productivity as well as that of their company.

A rough road ahead

Employers usually set pay increase targets several months before increases are due. The targets are typically based on various factors such as the prevailing economic outlook for the coming year. Once set, sudden changes to the forecast factors are very difficult to accommodate due to the time needed to rework the plans and the financial provisions supporting them.

“The process is the embodiment of a big ship turning slowly, and this year is shaping up to be just that kind of situation,” said Sedlmaier.

According to recent figures from StatsSA, the country’s current inflation rate has almost reached six percent, which is mainly due to higher food and fuel prices. In addition, credit rating firm Moody’s has projected that local inflation could reach as high as eight percent by the end of the year, a figure the US economy has already hit.

To offset inflation, the South African Reserve Bank (SARB) announced an increase in the interest rate by 50 basis points, following three consecutive rises of 25 basis points each. The SARB also noted that economic growth had been adjusted two percent downwards to 1.7 percent due to several short-term factors, including the floods in KwaZulu-Natal and the ongoing electricity supply constraints.

The sudden onset of Russian/Ukraine war and the conflict’s immediate impact on the global economy is also a significant factor. This, while businesses are still fighting back from the effects of the COVID-19 pandemic.

Lastly, economists report that while the outlook for a global recession was 25 percent at the beginning of the year, this outlook has increased to 50 percent. Others have suggested that such a recession may be mild compared to previous declines, like the 2008 financial crisis.

“Either way, employers need to be ready for anything,” said Sedlmaier.

Do you revise  pay increases or not?

The effects of inflation on worker attitudes can already be witnessed as unions, demanding increases of seven, 10 and even up to 15 percent are prepared to go on strike against employers offering six percent.

As a result, will companies be forced to implement interim mini-raises to offset the unforeseen inflationary conditions or even bite the bullet and revise their plans altogether? Can employers implement better cost-saving measures, such as more work-from-home allowances to alleviate the burden on workers?

“There’s no easy answer to myriad questions employers face and they will have to dig deep to find effective reward strategies,” Sedlmaier said.

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