This blog extends our series on inflation that we kicked off with a recent article. It discussed the causes and effects of current inflation and explained whether our wealth management strategies should change because of it.

Today, we detail the shorter-term side of the coin: the impact on income.

After all, if your transportation or food costs have skyrocketed, you may have watched your budget veer off the rails. This article contains tips to keep your expenses within your budget constraints.

Higher Leverage Opportunity

I'm sure you've heard that inflation impoverishes people by reducing real wages. The latter represents your paycheck in terms of the goods and services it can buy (imagine if rent, utilities, four tanks of gasoline, ten packs of chicken breasts, etc., were printed on your paycheck instead of euros).

Ironically, if you asked an economist "Why is inflation bad?", he would probably consider real wages a short-term problem. The rise in the price of labor – i.e. the average wage – would likely be included in his definition of inflation.

This theory has the following intuition: if firms earn more by selling more expensive products, they are left with more money to raise wages. But why would they do that when the owners can keep the money for themselves? They are pressured by inflationary expectations.

If the public begins to anticipate the rapid rate of price-level increases, they will demand better pay for their willingness to work. People who have not yet returned to the labor market after the pandemic are demanding higher wages to make it worth their while to start working again.

Higher wages, in turn, give existing employees the leverage of being able to change their employer if the salary does not match prices. Unions will push for higher wages in collective agreements.

All these effects are more pronounced when unemployment is low. That way, employees are not easily replaceable by outsiders. Firms have to try harder to retain them. As you can see in the graph, unemployment has been falling since the pandemic and is relatively low compared to the past average.

Source: Statistical Office of the Slovak Republic

The problem is that economic theorems do not work 100% in practice. Inflation, of course, causes some damage. Months may pass before inflation expectations and wages fully adjust to higher prices. And our bills are not getting waived for those months.

Moreover, average wage growth may not be uniform across the economy. In certain industries, firms may struggle to pass on higher costs to customers, causing wages to lag behind the general price level (conversely, in above-average industries, wages may rise faster than average prices)

What‘s the conclusion? Although real wages will be falling for some time, right now is the best time to ask for a raise. In an inflationary environment with low unemployment, your chances of success are higher compared to "normal times".

How to Use This to Your Advantage?

Since now is the best time to ask for a raise, sit down with your manager for 15 minutes to discuss the topic. We understand that it's the elephant in the room for most of us. We feel brash and have a natural human fear of rejection. That can't be completely eliminated, but a few tips will help ease it.

Spend a few minutes researching what salary is adequate for the tasks you perform. It can be revealed through job advertisements or by talking to colleagues who have been with your company longer. That way, you can be sure that the figure you're asking for isn't absurdly high.

It's also nice to have a few of your measurable accomplishments that helped the company on hand. Don't threaten to leave, and don't make direct comparisons to other employers. You'd position yourself as an enemy, and no one is happy making concessions to enemies.

Think of it more like a mutual bargain: you seek a setting that better suits you, in exchange for a willingness to bring more value to the firm in roles with more responsibility, if needed.

Naturally, you might also get rejected. If you still think you deserve to earn more for your skills, don't be afraid to change employers. Offers of entry-level salaries respond fastest to high inflation and employment.

You'll also be in a stronger bargaining position as you can pick and choose between offers. Mentioning a better alternative at an interview won't sound like blackmail this time.

If the higher-paying positions (whether in a new or current job) require skills you don't have, try to upskill yourself. There are tons of online courses available these days, the aim of which ranges from software to public speaking. They often cost only tens of euros and will teach you skills that most people lack.

Source: Statistical Office of the Slovak Republic

Retraining is also linked to the possibility of changing sectors. If you are in an industry with wages notoriously unresponsive to inflation, try looking into a related industry.

You might discover that you would perform similar tasks and missions in that industry (or even find it more fulfilling), with wage growth better reflecting the cost of living. The table above lists industries that best kept pace with prices in the first quarter (inflation is stated for Q1, hence the difference from the April figure).

What If I Fail to Increase My Income?

If you don't find opportunities to increase your income, you can always look for expense-reducing options in your budget. The first step is to find out what items you spend on.

It sounds simple, but many people feel ashamed of their expenses, coping by turning a blind eye to specific amounts. You can use reports in banking apps to track your spending or write it down in Excel.

If you have multiple bank accounts, prefer an automated solution, and want to get bonuses like creating budgets or planning for irregular, sizable expenses, try our personal finance management app Finbot for free. The full version will be free for Finax account holders once released.

Afterward, you can identify which items drain suspiciously high amounts. Found an unnecessary subscription on your bank statement? Cancel it. Hundreds for restaurants? Cook a couple more lunches at home.

In recent blogs, we've detailed ways to save on electricity and gas, fuel, emotional purchases, or appliances. At the same time, support is available thanks to the Recovery Plan. The grant will reimburse you for half the cost of some of the more environmentally friendly appliances.

If you have an old furnace or a high-consumption boiler, consider utilizing the grant. See this page for further information. The energy savings will come in handy at the start of 2023 when regulated energy prices are expected to increase.

Note: The part about the Recovery Plan only applies to Slovakia. If you wish to learn about the available support in other CEE countries, read our localized blog sections or schedule a call. We‘ll be happy to advise you!

We hope that some of the above advice will help you get extra protection from inflation. In the next and final blog of the series, we'll discuss inflation’s impact on debt and savings, again providing specific advice.

If you're interested in the reasons why inflation arose, its consequences, and the ideal response of a long-term investor, make sure to delve into the first part as well.