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Business Owners Can't Ignore Inflation

In times of inflation, it is difficult to keep up with increasing prices. In the U.S. we have been fortunate that inflation has remained relatively stable at 2% per year, until 2020 and 2021. In 2020, wages decreased sharply as unemployment rose during the COVID-19 pandemic. The government injected cash into the economy to make up for work slowdowns and stoppages which created strong inflationary pressure in 2021, 2022, and 2023.

Pay Increases vs Inflation

Inflation caught most business owners off guard. Business owners tried to increase their prices as their costs increased. They also tried to give their employees bigger raises than in past years. Unfortunately, both increases fell short of what was happening in our economy. In both instances business owners are reluctant to aggressively raise wages or prices because they are not sure if inflation is here to stay. If they raise their prices too high, they will lose customers. If they raise wages too much, they’ll be stuck overpaying employees who will expect high raises to continue. While this hesitancy is understandable, it can create a staff that is underpaid; and a company that is undercharging for its products and services.

The chart below shows a typical employee working 40-hours per week at $12/hour at the start of 2021. Their employer gives a generous $0.50 raise at the start of 2022; and then a bigger raise in 2023 of 0.75/hour. After it’s clear that inflation is a problem, this gracious employer gives this employee a mid-year raise of another $0.50 per hour.

At the end of this 2-1/2 year period, after the employer has done all they can to pay their employee fairly, this employee is behind by $3,168 from their cost of living. This is equal to 1-1/2 month’s wages.

There are several things that employees do to try to pay their bills.

  1. They allow bills to go unpaid and experience added interest on credit card debt, or late payment fees.

  2. They get a second job to earn more money to pay their bills.

  3. They try to get overtime hours to make up for lost earnings.

  4. Start looking for higher pay with other job opportunities.

In every case, they will be asking their boss for more money, more overtime, or less hours so that they can work a second job.

It’s Not Your Fault

I want to be clear with you employers and small business owners….”this situation is NOT your fault!” However, it is your responsibility to understand what is happening, and right your business ship as soon as possible.

Here are some ideas that may help you battle this inflation caused pay gap.

  1. Offer a one-time bonus. You can estimate what cumulative pay gap your employee is experiencing and offer a bonus that is equal to that gap over the past few years.

  2. Increase Wages above the CPI. You can increase wages above the CPI for a period to make up for lost earnings in the recent past.

If you haven’t kept pace with wages, chances are that you’ve also failed to increase your prices in a timely manner. Unfortunately, you cannot raise prices with your customers above what the market will bear. However, you can check competitors’ prices and at least keep pace with others in your industry.

Merit Increase Are NOT Cost of Living Increases

Something else to understand is that pay increases given to keep up with inflation are not merit increases. A merit pay increase is given to an employee who is improving their skills and being more productive at their job. If your employee deserves merit pay increases, these must be given in addition to the pay increases you give to keep pace with the cost of living.

Over Time & Commissions

If your employees have tried to work longer hours to earn overtime pay to compensate for lower wages, you may have to reset wage expectations. In our example, a $12/hour employee that works 20 hours of overtime will effectively be earning $21/hour for a standard work week. Yes, they are putting in 20-more hours. However, you are paying a lot more for poor productivity for that extra 20-hours. It may be worth considering paying this same worker $16/hour, cutting all overtime, and hiring additional employees in your business.

CPI vs Real Inflation

You’ve probably heard news anchors say that inflation peaked in 2022 and will return to normal in 2023. The truth is that different costs have inflated at different rates. The three items that have inflated the most are housing, gasoline, utilities, and groceries. All four of these items are necessities and affect lower income earners more than higher income earners.

Housing: The inflation for housing rose in 2020 as interest rates were kept artificially low to stimulate the COVID19 economy. This prompted massive home buying in a constrained housing market driving home prices higher. As inflation took hold in 2022, the Federal Reserve opted to raise interest rates to add more costs to home mortgages. If this wasn’t enough, the government increased property taxes on increased home valuations. All three of these factors has caused and is causing housing inflation to far exceed the CPI.

Gasoline: Whether it is the war in Ukraine, the recent war in Israel, the restrictions of oil exploration in the U.S., the gasoline prices have experienced a roller coaster ride for the past several years. There is no way that you can adjust how you pay employees for gasoline prices. Gasoline will range between $5/gallon to $2/gallon and this is not a cost that always increases with time. If your employees work from home, this cost increase will be avoided. If your employees drive their personal vehicles for business or commute long distances, this cost will be a greater portion of their increased or decreased cost of living.

Utilities: As we have attempted to switch from carbon fuel sources to renewable energy sources, and due to spikes in natural gas prices, electricity bills have increased by double the rate of inflation.

Groceries: Groceries have also increased at double the rate of inflation. Since food is a necessity for low- and high-income households, this cost will affect all employees in your company equally.

Give Yourself a Raise

At times of inflation, business owners feel a squeeze between customers freaking out about price increases, and employees wanting more money. They believe that they must sacrifice their own income so that the company can survive these inflationary pressures. This is a mistake. When inflation is happening, it is important that you revise your business plan quarterly, raising prices, and raising wages. This means you must increase your pay along with everyone else.


About me. I have been actively engaged in the energy efficiency, renewable energy, and energy conservation industry all my professional career from 1987 until now. I was a licensed Professional Engineering in six states and a Certified Energy Manager (CEM). I worked as a sales executive, energy engineer, sales manager, and entrepreneur. I started, grew, and sold my own Energy Service Company (ESCo) called Ennovate Corporation (1997 to 2013). I am now a certified professional business coach for business owners, engineers, and business development executives.



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