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Inflation Rate
Human Resources » Organizational Reforms

Chrm Message From: nath Total Posts: 36 Join Date: 07/06/2008
Rank: Executive Post Date: 27/11/2008 08:59:27 Points: 180 Location: United States

Hi All,

When it comes to increment to staff, do we have to consider the inflation rate of a country ? IF yes.

How does this calculation works? what are the parameters we got to consider?

Kindly request your inputs.

Thanks In Advance


Chrm Message From: dharm Total Posts: 27 Join Date: 07/06/2008  
Rank: Executive Post Date: 27/11/2008 09:05:04 Points: 135 Location: United States


For increment of staff, inlation rate is generally considered a bencjhmark. The inflation rate of nation at a particular period may not reflect the true inflation effecting industrial workers as it consider the whole gamut of economy movement. Its better to focus on sector variation in specific index like Consumer Price Index which truly reflects the inflation in household items. This index is declared by the Central bank of the country or the Finance Ministry periodically. Some company also depends on dollar exchange rate as a benchmark to determine inflation for the purpose of increment. But a developing nation may artificially administer dollar rate to check outflow of foreign exchange which will then not reflect the true inflation.

It works this way. Suppose the Consomer price index for a country on 1st April is 100. Against that you fix a pay of Rs. X. On the next year on 1st april, the CPI is 105 i.e. the CPI has changed 5 %. Then you fix the pay at 0.05X inthe new year. The peridicity of such fixation can be determined by the company. Moreover you may not neutralise the entire change in CPI and may decide to hike only 80% of change in CPI.

For example the Central Publec Sector Undertakings in India has a pay component called Dearness Allowance (IDA) whose periodicity of revision is 4 times a month and enjoys 100% nutralisation.

Chrm Message From: roshni ghosh Total Posts: 21 Join Date: 07/06/2008  
Rank: Executive Post Date: 27/11/2008 09:07:23 Points: 105 Location: United States

Dear dharm,

Just to check you on the basics, DA is not calculated as per WPI but as per CPI (Consumer Price Index),more specifically CPI-IW (Industrial Workers) as it is generally argued that CPI is a better index to determine impact of price rise on cost of living. This is because food items has greater weigh in CPI-IW than WPI. In fact the Occupational Wage Survey (6th round, 2005) conducted by the Labour Bureau, National Commission of Labour points that among the service industries having DA as a pay component, 98.83 % use CPI Numbers brought out by Labour Bureau for payment of DA, 0.28 % use CPI Series brought out by State Govt. & the remaining 0.89 % are not using any CPI Series.


Chrm Message From: akchakraborty Total Posts: 24 Join Date: 07/06/2008  
Rank: Executive Post Date: 10/09/2009 06:36:37 Points: 120 Location: United States


Inflation rate is generally captured in the pay structure thru the component called Dearness Allowance. You might not notice this component in the salary structures of new service industry organizations. The reason behind this is that due to the good profits the service sector is doing lately and also due to the competition, the pay scales are quite high and quite competent to take care of inflation. For example on average the service industry increases its pay scale every year by about 10-15 percent which is comfortably more than the inflation rate which has been around 7 percent since the past couple of years. Hence if you are an aggressive paying organization, you would not need to consider inflation rate while annual increments.

Now lets talk about Dearness Allowance which is the way in which inflation is factored in the payroll. You might find this component in the salary structures of manufacturing or government organizations. Dearness allowance (DA) is calculated using the latest price index figures like WPI (Wholesale price index). These index figures are published by certain government / semi-government economical survey organizations in leading publications. Some of these indexes are weekly, some monthly, some quarterly and some annual in nature. You can choose the best fit index and then accordingly update your DA accordingly. Hence DA is basically a formula / function which captures the inflation index and outputs the amount. While staff increment you can use the DA component to factor the increment, but do not mix up the performance based increments with this.