Inflation is high but salaries may be higher

The buzzword in every economy barring Japan is inflation, as it is hitting the pocketbooks of millions, if not billions of people around the world and Sri Lanka is not an exception. 

While some amount of inflation is not bad, too much of it is for prolonged periods isn’t good. 
Since last April, inflation started raising its ugly head and remained stubbornly higher ever since, prompting governments to cut back on their spending and central banks to reverse their pandemic playbook of slashing interest rates to rock bottom levels and sloshing markets with trillions of dollars worth of liquidity.

However, if the wages have gone up above the inflation or at least kept up with the rate of inflation, it isn’t too much to worry, at least in the short term. This is a phenomenon seen among some segments of the Sri Lankan workforce, given how much their wages have increased. 

However, the caveat here is the wage spiral inflation. Higher wages feed into the consumer prices creating an unending cycle of wage-driven inflation as people would begin demanding even higher wages expecting soaring inflation. 

The latest consumer inflation reading in Sri Lanka for January was 14.5 percent and is the highest since more than 13 years, according to the Colombo Consumer Price Index. This was an increase from 12.1 percent in the 12 months to December 2021. 

However, the wage rate index for the informal private sector employees in Sri Lanka grew by 17.0 percent in the 12 months to December 2021, making them in fact better off or at least shielded from the ugly side of inflation.  

At a more granular level, informal private sector employees in the agriculture sector saw their wages rising by 15.7 percent, employees in industry by 17.6 percent and employees in services by 17.1 percent over the same period. 
However, there are also segments in the workforce who were left behind. The public sector employees didn’t see their wages rising in 2021, according to the index, while the wage rate index hasn’t measured the changes in the wages in the formal private sector, a notable absence. 

However, many salaried individuals stocked cash during the two years of the pandemic as their typical spending patterns disrupted due to the pandemic-induced lockdowns and restrictions. This was seen and confirmed by the banks whose deposit piles went up sharply high in 2020 and 2021. 

People unleashed their savings and earnings even amid record high inflation no sooner the normalcy returns and this was seen from the huge spending spree during the final three months of 2021, which powered the listed company performance.

The early signs indicate that people are loosening their purse strings much faster and deeper this year with absence of virus-related restrictions.