When inflation balloons, wages deflate
Rising costs are outpacing traditional raises. Here’s what you need to know about inflation’s true impact on your employees.
We need to talk about inflation. It’s one of those icky topics that most of us wish didn’t exist, but it’s been on a rampage lately. Just two years ago, in 2022, the U.S. saw the highest inflation rates in 40 years. And although the news likes to say that inflation is “going down,” that just means “prices are going up more slowly now.” Nothing gets cheaper!
Here’s an example: Over the past four years, the average grocery bill has increased by 25.8%, which means that a family of four who paid $10,000 for groceries in 2020 is paying $12,580 today. Now, combine that with everything else that’s getting more expensive — rent, property taxes, gas, utilities, cell phone bills, travel costs, lodging, and school meals, to name a few — and all of a sudden you have a lot of American families in a lot of trouble.
This means that we as bosses today need to unlearn whatever we’ve been taught about raises in the past. As employers, we’re used to living in a world in which inflation rarely goes over 3% — and is usually less than that. It’s barely a noticeable increase, so when we gave our employees a raise from $20 per hour to $22 per hour, we were giving them 10% more spending power! They could buy more stuff. They were happy and we were happy.
But it’s 2024, and that world is gone. It’s been dying a slow death for the last four years, leaving us with an America that is unrecognizable to anybody who has been in business less than 40 years, since the last great inflation spike.
We’re talking about this because I see a huge gap between what employers understand about inflation and what employees understand about it. I recently listened to an interview in which an employer was steaming mad. Why? He was upset because he gave his employees a raise from $20 per hour to $22 per hour. He thought he’d done a great thing — 10% more! And he was really upset that the employees weren’t more grateful.
He also mentioned that he’d held pay steady since 2020, to deal with COVID. Well, with 21.78% inflation from 2020 to 2024, his raise from $20 per hour to $22 per hour was … essentially a pay cut. Oh.
This interview, along with other conversations I’ve had on this topic, made it clear to me that the gap between the bosses and their employees is becoming so wide that the bosses don’t really understand what their employees are dealing with as they try to manage their daily lives.
The simple fact is this: People like me, and many other business owners and leaders, do not worry about how inflation will impact our lives. Speaking for myself, I am a wealthy individual. I can’t buy a private plane, but when I go out to eat, I don’t look at the prices on the menu, and when I fly, it’s in the front of the plane. I hope that doesn’t sound like bragging, because the point is that I am among the oblivious.
For those of us who “don’t have to worry about money,” the idea of inflation is kind of an ethereal thing — something we’ve seen on the news, but can’t really relate to in our daily lives. If my cell phone bill is more expensive than it was a few years ago, I truthfully don’t know how much more … and I don’t really care. Most of the wealthy people I know don’t actually know how much stuff costs. Ask the average business owner how much the price of eggs has changed in the last five years and you’ll get a blank stare. This isn’t a fault on their part — it’s a waste of energy to pay attention to things that don’t matter. No matter how much money you make or how you make it, the thing to do in a life with limited time and attention is to pay attention to what matters. If the price of a cup of coffee doesn’t matter, then don’t pay attention to it!
In that same way, the smart thing for people who have limited funds to do is to know where every penny is going. If I can afford $100 worth of groceries every week, I absolutely notice — and fret about it — when my grocery bill goes to $105. If you have employees in the $20‑$30 per hour pay range, this is their daily reality. They need to consider, purchase by purchase, what they can afford now and what they need to put off. Personally, the price of a co-pay to go see a doctor has never crossed my mind as a barrier, but for someone making $20 per hour, it can be the difference between “dealing with it” and getting seen by a medical professional.
The Major Costs of Living
So … let’s build some empathy. Let’s understand the lives that our $20-per-hour and $25-per-hour employees are living. We’ll start with the basics. There are four major costs for most low- to moderate-income people that take up a lot more space in the budget — and in their worrisome thoughts — than they do for high-income people.
- Housing. Most high-income people own a home and, if they have a mortgage, likely pay a fixed interest rate. A mortgage payment of $2,800 a month in 2017 is *still* a mortgage payment of $2,800 a month in 2024. (I know because … that’s my mortgage payment!)Unfortunately, most homes are owned by the wealthy. Our $20 per-hour employees rent their apartments, and apartment rent has increased by $1,000 per month or more in that same time frame. It might shock you to learn that the median monthly rent in the US is now almost $2000 per month.
If we do some quick math: $20 per hour x 40 hours a week x 4 weeks = $3,200. Rent is potentially 62.5% of their monthly income, and that’s before taxes.
- Car payments. If you’re like me, you probably bought your car with cash and simply own it.The reality of the average employee is making a payment on a car loan every single month. And that payment has skyrocketed! Five years ago, in 2019, the average car payment was $554 per month. Today, in 2024, it’s $735. That’s an extra $200 a month just so they can get to work every day. If they’re making $20 per hour, that means they have to work 10 more hours a month just so they can drive the same type of car they drove pre-COVID.Accounting for just rent and a car payment, they’re already spending more than they’re earning.
- Food. We mentioned the overall inflation rate for groceries earlier, but it’s important to break that down. The cost increase for grocery staples over the past four years includes:
Eggs: ⬆️ 54%
Milk: ⬆️ 36%
Cereal and bread: ⬆️ 28%
Fresh produce: ⬆️ 21%
Beef: ⬆️ 20%
Chicken: ⬆️ 25% - Credit cards. This is how many employees in this wage range fill in the gaps. Rising interest rates mean that the half of all Americans who carry a credit card balance (our folks making $20 to $30 per hour) are paying about $100 a month more than they were five years ago for the same balances.
When you take a look at all of these hard numbers, it’s possible to see why raises that felt huge before COVID feel tiny today. At best, the raises we’re giving out keep our employees where they were in 2019. And in many cases, the raises are actually not even catching up with inflation.
Why the misperception?
So, why don’t we all know this? Simple. Inflation was not a problem for a really, really long time. It simply doesn’t factor into our thinking. You have to go back to the 1960s to 1980s, the last time inflation rose tremendously, to understand how it affected prices and wages.
But most of us are still comparing hourly wages from *back when we relied on hourly wages.* Few of us boss types *started* as boss types, we almost all started as hourly wage employees. The last time I made an hourly wage was 2009, when I made $14 per hour as an entry-level IT employee. So, today I might think, “Well, if I pay an entry-level employee $20 per hour, that’s way more than I made!” But I’d be totally wrong. To be able to buy the same quality car or pay for the same size apartment in 2024, I’d need to make $22 per hour. Ouch.
Even though I know this is true, it still feels wrong. I have to pay someone $22 per hour today to give them what I was getting for $14 per hour? Are you kidding me?
To see if this was true, I played a little game. I found the first apartment I rented in Portland and pulled up my old lease. I paid $1,400 per month for that apartment. Today it’s listed for $2,200 per month, and it’s now 20 years older and more beat up!
Ouch!
Where does the money come from?
Now, I hear a lot of people shouting, “But we haven’t got the money to do big raises!” And it’s true, many small businesses have failed to keep their prices up to date with inflation. So I wrote an article for you also!
So, to recap: In a low-inflation world, it was easy to give small raises that increased people’s standard of living. In a high-inflation world, it’s not. The same is true of our prices. Low inflation means little price increases add more profit, but in a high-inflation world, little price increases might be putting us even farther behind the economy.
To put it simply, our traditional way of giving the occasional 1%‑2% increase doesn’t cut it anymore.
A Word of Encouragement
When you’re thinking about employee wages, try to remember that many employees are (seriously, legitimately) worried about how they’re going to afford milk and eggs, and gas, and rent, and medicine, and utility bills, and their kids’ school clothes, and literally everything else.
And even if they have their budget down to the penny, there might not be any money left over for anything else. This can cause them to stress out at work when they’re faced with scenarios like constant invitations to lunch, after-work happy hours, or group outings. Stop it with the “one check and we split it however many ways,” because some of your dinner companions can only spare enough money for the $10 appetizer. Maybe have lunch catered in more often.
Not to say that those team bonding opportunities should be completely eliminated, but making decisions that accommodate all budgets is one way to build a trusting relationship with your employees.
In a low-inflation world, it was easy to give small raises that increased people's standard of living. In a high-inflation world, it’s not.