Two famous people, physicist Niels Bohr and baseball player Yogi Berra, are credited with saying that “Prediction is very difficult, especially about the future.” Joking aside, trying to predict macro-economic trends is particularly difficult, and something even mainstream economists often get wrong, e.g., the 2008 bear market.
Earlier in 2021, many were suggesting that rising price inflation would be transitory. Mounting evidence has recently led Federal Reserve Chair Jerome Powell to admit that “the threat of persistently high inflation has grown.” While the predictions of economics experts sometimes make weather people look good, there is now enough concern about prolonged inflation that more business leaders are adjusting certain decisions to accommodate this likely reality.
The most obvious people in organizations impacted by the concerns of inflation are those in finance, procurement, and any capital-intensive parts of the business. But any leader who has a budget should consider the impact of inflation, and that includes many HR leaders. Further, where HR professionals—whether senior leaders, HRBPs, or professionals in a COE—are interacting with line of business leaders, they can raise thought-provoking questions about spending decisions on programs, people-related products, etc. Given relatively lower inflation for several decades, many business leaders lack experience in adjusting budget and spending decisions during times of significant price inflation.
Without predicting how long the current bout of higher inflation will last, here are some evergreen practices that HR leaders should consider now and anytime that inflation rears its head in the future:
- Spend more now. It might seem counter-intuitive, given that prices are rising. But as the calendar year (and for many organizations, fiscal year) comes to a close, is extra budget available? If so, consider what products, services, or rents you know you will need in the near future: would it make sense to purchase them ahead of schedule at current prices in order to avoid likely future price increases? Assuming your organization is doing well financially, and you don’t need to save those dollars for emergencies, etc., getting ahead in this way can provide increased value at the margins.
- Consider asking for more funds now. Taking that logic further, if your organization is sitting on cash, inflation makes that money worth more today than tomorrow. Loans are also currently available at very low interest rates. This might change in the future, should the Federal Reserve and other central banks raise rates, and commercial banks follow suit. But if you can think of major purchases that might be sensitive to inflation in the coming year(s), discuss this with your CFO to consider whether getting the necessary budget from cash reserves, or even taking on additional debt, would make sense for the organization. Keep in mind that with inflation, debt gets paid back with less-valuable money in the future.
- Talk with your vendors. Ask your vendors probing questions: Do they expect their costs to go up? Are they considering price increases or model changes in the new year? If so, locking in current contract rates for longer periods could be well worth it, even if it involves paying some of the costs early. If you intend to re-up with a vendor in six months or a year anyway, why not do what you can to lock in current contract rates now, for as long as you feel comfortable committing?
In particular, consider any of your subscriptions or subscription-like purchases. Can you extend them at the current rates? Most vendors with subscription models measure part of their success based on renewals; early renewals and contract extensions, even with looming inflation, are often welcomed. If you’ve not checked in with a favorite product or service provider in a while, find out if they might have a new subscription model for what you have been buying in a more discrete way. For instance, if you’ll soon have more employees working on-site again, are there food, co-working, or other vendors you use that have introduced a subscription model in the past couple of years? If so, how long of a subscription are you willing to commit to now, at relatively lower rates than what might be coming?
- Don’t throw good money after bad. This is a more universal consideration: think carefully about continuing to spend money today on products, services, or initiatives that are not providing positive ROI. It is human nature to commit what economists call the sunk cost fallacy, the idea that because we’ve already spent so much time, energy, or money on something, we need to keep at it and see it through. This is wrong: the past is the past, what is done is done, what is spent is spent. What matters is the marginal value of your time, energy, and money today: is it a net positive to continue on the previously set course or not? If yes, great. If not, then time, energy, and/or money should be diverted to higher-value uses. If you are doing an analysis of expenditures now in the face of inflation, then it is a good time to consider this aspect of your spending and goals as well.
- Decrease costs through automation and digitalization. This too is a trend that often makes good economic sense at all times (i4cp members should review our 2019 report Automating Work: The Human/AI Intersection) as long as the ROI of the efficiency- and productivity-boosting change is positive enough to make it worthwhile. But in a sustained inflationary environment, making such improvements can be even more important because you end up eliminating or at least reducing ever-higher costs in the future, whether by digitizing older technologies, replacing some human tasks with automation, or augmenting humans’ abilities to provider higher value work in exchange for their higher wages due to inflation. In short, the value you get from physical assets, technology, and employees must at least increase at the rate of inflation, but preferably faster.
- Don’t fall behind in the compensation inflation race. All the above considerations must be weighed against the inflation that is likely going to occur in what for many organizations is their biggest expense: their people’s compensation (including benefits.) Wage inflation often lags behind inflation in the cost of other goods and services, but that doesn’t mean it isn’t coming. After Amazon and a few other organizations led the way pre-COVID, many organizations are raising their internal minimum wages in the U.S. to $15 or higher. Others are raising pay for people in various critical roles, or in their pursuit of greater diversity in leadership ranks. And after a modest 1.3% increase in 2021, Kiplinger reported that the Social Security cost-of-living adjustment (COLA) for retirees—a benchmark that is also used for many other pay considerations—could rise by 5.9% next year.
Between consumer prices driving up employees’ needs, and the war for talent currently favoring employees, significant compensation inflation seems inevitable. If competitive compensation pressures will increase faster than vendor pricing or the benefits from buying ahead on physical goods, then given the significant costs involved in losing valuable employees, savvy leaders will focus at least some of their excess budget dollars in this area now to avoid falling behind. HR leaders need to not only focus on this for their own employees, but also in how they educate and support managers and leaders throughout the organization.
None of the above practices should be taken reactively. Instead, take the time to look over all products and services you regularly purchase, as well as rents paid and employee compensation, and carefully consider which might be impacted the most by inflation, either directly or indirectly. There are opportunity costs to spending more now, but the cost of not spending more could be even greater down the road.
Tom Stone is a Senior Research Analyst at i4cp.