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5-2011 From the Editor
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By Tim Triplett, Editor-in-Chief 

Inflation to Take a Toll on Employee Morale

Inflation is virtually certain to be a byproduct of the government’s “quantitative easing” strategy to turn the economy around, and businesses small and large need to anticipate and account for it in their plans for the next several years, said economist Alan Beaulieu, president of the Institute for Trend Research, Boscawen, N.H., who addressed members of the Copper and Brass Servicenter Association March 31 at their annual meeting in Austin, Texas.

To head off a disastrous depression after the bubble burst in fall 2008, the Fed injected nearly $2 trillion into the flagging economy. With the recovery still sluggish, the central bank announced plans to buy an additional $600 billion in long-term Treasuries by the end of this year’s third quarter. “Quantitative easing is going to lead to inflation in this country. As the money supply goes up, it is good news for consumers [because it keeps interest rates low], but eventually it leads to higher prices,” Beaulieu said.

Inflation is not necessarily all bad. One country’s inflation is another’s opportunity. For example, as prices go up in China, which has its own serious inflation concerns, competitors in other countries gain a cost advantage. “Some firms have already started to give up on China and move back to the U.S.,” Beaulieu noted.

On the home front, employers need to be sensitive to the effects of inflation on their workers. “As inflation begins to eat away at their salaries, the people who work for you are going to be facing a significant decline in their standard of living. Who are they going to blame? President Obama or Ben Bernanke? No, you. They will come to work with bad attitudes. Productivity will go down the tubes, and so will your profitability,” Beaulieu said.

Despite the high unemployment rate, which has kept wages in check, inflationary pressures will raise the cost of living, causing a gap into which employee morale could tumble. To keep workers even and happy, employers should plan to give raises of at least 150 basis points above the Consumer Price Index both this year and next, Beaulieu said. To offset the higher labor costs, along with inflation’s effects on the cost of materials and capital, companies should expect to raise their prices, as well.

“Plan on it, budget it, make it happen,” Beaulieu said. “If you don’t, the lesson from the ’70s is pretty simple. Firms that don’t raise prices [in an inflationary environment] go out of business.”

  
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