Inflation: The HR Perspective

Inflation is the word of the day.

Inflation has been the word of the day for at least a year. If it had to share the title with any other phrase, that phrase would undoubtedly be interest rates. 

Inflation matters to companies. P&L leaders worry about input costs and the ability to price products and services. 

HR leaders should care about inflation just as much. Inflation impacts human resources in many ways:

• Employees feel the impact of raising prices. This changes their feelings of well-being and their feelings of how well they are compensated.
• Inflation impacts decision-making. It raises the risk of strikes and work stoppages, making negotiating more difficult, and making cash compensation a more important issue for all personnel in the compensation and benefits mix.
• The misery index is the unemployment rate added to the inflation rate. This index measures how the populace (and, therefore, employees and consumers) feel about their economic well-being.
• In organizations where personnel costs are the lion’s share of costs, inflation can make relations with the workforce contentious and make planning for the future more difficult. Personnel worry about their own future with the organization, while management has perhaps more difficulty controlling costs than they would compared to purchasing other inputs (like commodities, electricity, fuel, etc.) in well-established markets. 

 The Bank of Korea released its latest judgment on the macroeconomic environment and the need for monetary tightening or loosening, saying: 

The Monetary Policy Board of the Bank of Korea decided today to leave the Base Rate unchanged at 3.50% for the intermeeting period. Although inflation has slowed, it is forecast to pick up again to around the 3% level since August and to remain above the target level for a considerable time. In addition, uncertainties regarding economic conditions and monetary policy in major countries have risen. It is also necessary to closely monitor household debt trends. The Board, therefore, sees that it is appropriate to maintain its current restrictive policy stance. Regarding the need to raise the Base Rate further, the Board will make a judgment while assessing the changes in domestic and external policy conditions.

The currently available information suggests that global economic growth is projected to continue slowing due to the effects of elevated interest rates and a weakening recovery in the Chinese economy. Global inflation still remains high, though falling gradually, and the pace of the inflation slowdown has differentiated across countries. In global financial markets, government bond yields have risen and the U.S. dollar has strengthened due to prospects for a prolongation of the restrictive policy stance in major countries. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected by the movements of international commodity prices and the global inflation slowdown, monetary policy changes in major countries and their effects, and developments in the Chinese economy.”

Meanwhile, stock markets and exchange rates across the globe are conflicted (as usual) in trying to read the inflation tea leaves. Will the US Federal Reserve raise US interest rates again, or won’t they? Will the European Central Bank stay hawkish, or won’t it?

Speaking at the Jackson Hole Conference in Wyoming on the 26th, Bank of Japan Governor Kazuo Ueda, stated, “We believe underlying inflation is still slightly below target.” So, Japan faces a very different economic reality than much of the world has faced over the last year.

If inflation is a monetary phenomenon, why haven’t all the interest rises completely tamped it down? Why is it seemingly so persistent this time?

It appears the answer is to be found in non-monetary influences—influences interest rates and the world’s central banks have less control over, such as the following:

•  Geopolitical Risk. Geopolitical risk is reshaping supply chains across the world. From Russia, where sanctions required new export markets and new import options, to the US, where fear of future supply chain disruptions from potential conflict with China is making US companies shorten their supply lines. Redesigning, shortening, friend-shoring, and re-shoring all have one thing in common: the new supply chains have inflation baked into them. They are inevitably more expensive than the old supply chains because the old ones were optimized for cost, and the new ones are optimized for risk minimization. Companies have simply decided to accept these higher costs for greater future safety. 
• Climate Change Regulation. New regulations promoting green supply chains also involve new costs. While these regulations may be necessary and promote future savings, there is a short-term cost involved in adopting new technologies and new processes. Complying with new climate change mandates is going to be expensive for a while and that is not the type of inflationary pressure interest rates can tackle as it is not strictly demand-based. 
• Knock-on Effects of Other Influences. Lingering impacts from the pandemic (impaired supply chains), the War in Ukraine (energy and food costs), new US-China Cold War (trade restrictions and emerging trading blocs) are all influencing supply and demand and, therefore influencing prices. Impacts from the pandemic are waning slowly. Everyone hopes the War in Ukraine ends soon, but even if it does, the supply impacts are not likely to end with it. US-China tensions are likely to be with us for a long, long time.

So, inflation is a tough nut to crack right now. Rather than waiting for it to be solved, we’re all probably going to have to learn to live with it. That is no less important for HR leaders than for P&L or finance leaders. Perhaps even more important.

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Article originally published in Steve's LinkedIn Newsletter HR Asia August 28, 2023