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Pay Raises Are Coming In 2022

Investors have seen rising interest rates and inflation. Could employees soon see salary increases in 2022? Four experts give their outlook to raises, wage inflation, and more.

The New Year beckons rising interest rates and high inflation. Consumer prices rose at the fastest pace since 1982, soaring by 6.8% year-over-year in November. The cost for food, housing, and gas spiked in 2021, as the supply crunch pushed prices up and federal stimulus programs supported households struggling to stretch every spending dollar.

The Federal Reserve is expected to combat inflation with three 0.25% rate hikes by the end of 2022 and conclude pandemic-era policies as the job market improves. The U.S. stock market is hovering near record highs, but all eyes are squarely on the dynamics between rate hikes and yields.

The so-called Great Resignation is evolving into a retention battle for companies seeking to attract and keep talent. The tight labor market means businesses are offering incentives and benefits on top of wages.

“Wages have not kept up with the recent burst of inflation. Americans continue to believe that inflation will cool off in the longer run, but there have been no inflationary expectations that can,” warns Gary Shilling, founder, and president of A. Gary Shilling & Co. He expects “as in the late 60s and 1970s… a wage-price spiral.”

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The big question is whether the pay increases will match inflation to the extent that workers are satisfied. Public and private companies may take varying compensation approaches to remain competitive and prevent shareholder or employee backlash.

Matthew Luzzetti, Deutsche Bank Chief U.S. Economist, says, “the pandemic remains the key factor keeping people away from the workforce, particularly for prime-age individuals with children. With omicron leading to another wave of cases — labor supply is likely to remain very constrained early in 2022, leading to accelerating wages and low unemployment.”

Salary Increases on the Horizon?

Wage inflation is a crucial issue to watch as the Great Resignation evolves into the Great Retention. Public companies need to strike a balance between retaining talent and giving up margin for labor costs. While some companies focus on one-time bonuses that do not alter base salary, compensation incentives such as long-term equity or health and education benefits contribute to employee satisfaction.

The Bureau of Labor Statistics data also showed producer prices increasing at the fastest pace on record in November 2021, pointing to higher consumer prices down the road. Yet, in the labor market, wage acceleration is leading to pay compression challenges - or pressure on employers to hike overall compensation.

Steven Blitz, chief U.S. economist and managing director for global macro at research service TS Lombard, expects “wage growth to run hotter in 2022 and through this cycle,” as “current inflation subsides, but wage growth has only started to accelerate.” Blitz attributes strong corporate profits, the shifting labor market demand for mid-skilled workers, and the smaller number of Gen Z employees but warns that “the Fed can go too far and kill this by supporting a too-strong dollar for too long.”

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According to the Conference Board‘s Salary Increase Budget Survey, private companies are planning the highest increases in pay compared to public companies, with overall compensation budgets at the highest levels since the financial crisis. The combination of wage growth and the rise in inflation is reflected in the projection of salary increase budgets for 2022, climbing to 3.9% in November from the 3% reported in April 2021. 46% of the survey respondents noted higher wages for new hires, while 39% attributed higher inflation to the adjustment in budget.

Despite rising pay and expectations for salary increase budgets, the hikes in nominal wages may not be sufficient to keep up with inflation. The COVID-19 pandemic and ensuing economic uncertainty paved the way for record wage growth and labor market churn.

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There’s good news and bad news. Most employers base compensation on the cost of labor and not the cost of living.

David Schassler, Portfolio Manager of the Inflation Allocation ETF, RAAX, at VanEck, points out that he’s “concerned about the stagflationary scenario. Employees are now taking the reins and taking control. I think profit margins are going to go down.” As investors, he says that you can “distinguish yourself…by pivoting towards assets that actually benefit from higher inflation.”

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The trifecta of inflation, tight labor market conditions, and heightened employee expectations, means that organizations are paying attention and, at a minimum — factoring in variable-pay incentive bonuses.

Related: Which American Workers Have Gotten the Biggest Raises?

Despite rising pay and expectations for salary increase budgets, the hikes in nominal wages may not be sufficient to keep up with inflation. The COVID-19 pandemic and ensuing economic uncertainty paved the way for record wage growth and labor market churn.

There’s good news and bad news. Most employers base compensation on the cost of labor and not the cost of living. The trifecta of inflation, tight labor market conditions, and heightened employee expectations, means that organizations are paying attention and, at a minimum — factoring in variable-pay incentive bonuses.

Watch: How to Play the Inflation Trade - Presented by VanEck: