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Inflation can make pay rise feel more like cut

Published on Friday, 11 Feb 2011

Bonuses and salary increases can sometimes end up feeling like pay cuts. To borrow the maxim of economic theories, ceteris paribus - all other variables being held constant - higher pay should be good for workers. Unfortunately, things are not always constant.

In a survey, human capital consulting and research specialist Mercer raised its pay-increase forecast for this year from 3.4 per cent to 3.8 per cent. The latter figure is based on Mercer's fourth quarter Market Flash Survey in late November covering 84 multinationals from various industries, while the former came from its Total Remuneration Survey carried out in the middle of last year.

The industries covered include hi-tech, chemical and consumer goods, and pharmaceutical and health care. Among these sectors, the last reported the highest projected salary increase of 4.4 per cent, with hi-tech lagging the rest at 3.5 per cent.

"Some industries faced a relatively difficult business environment during the financial crisis, but they are now recovering," says Connie Leung, Hong Kong business leader for Mercer's information product solutions business.

"Employers need to provide salary increments comparable with the overall market competitive rates in order to keep their best talent."

On the face of it, the upward adjustment should be good news. But, with Hong Kong's inflation rate expected to jump this year, any gains in pay could be negated by more expensive consumer goods and services.

In his 2010-2011 budget, Financial Secretary John Tsang saw the average underlying inflation rate at 1.5 per cent for last year and 3 per cent for this.

By comparison, in 2009, the city's average inflation rate was 0.5 per cent based on the composite Consumer Price Index (CPI), or an underlying inflation of 1 per cent if the impact from the government's one-off relief measures was excluded.

With an alarming 5.1 per cent spike in mainland inflation in November - the highest in 28 months - and destructive weather patterns expected to disrupt the flow of food and raw materials from Australia, Europe, the Americas and the rest of Asia, Hong Kong consumers should brace themselves for rising prices, including rents.

In its report in January, Hang Seng Bank analysts joined a chorus of economic researchers warning of a jump in Hong Kong's CPI by as much as 5 per cent this year from 2.5 per cent last.

With the erosion of purchasing power, workers are expected to demand even higher salaries, which is bad news for employers.

"If inflation shoots up, then it will be a problem," Leung says.

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