In countries where inflation is particularly high, ECA undertakes additional cost of living analysis so that companies can check that they continue to protect their assignees’ spending power.
ECA carries out two main cost of living surveys each year (in March and September), when prices are collected and indices calculated for 470 locations. This is usually sufficient given that 85% of companies review salaries only once a year. However, at any given time there tends to be a small group of locations where inflation is particularly high. For these there is often a demand for more regular price updates so that companies can check that their cost of living indices are still providing adequate salaries for their assignees.
To meet this need, ECA carries out two further surveys each year for high-inflation countries in June and December. Price data for these interim surveys is collected using the same multi-source approach we use in the regular surveys.
ECA selects locations to research in the interim cost of living surveys where inflation is expected to be above 10% over a six-month period. The surveys provide the information you need to track your assignees’ spending power in locations where conditions are changing rapidly and equip you with the data you need to respond appropriately when required.
Managing unscheduled salary reviews
Just over half of companies using a home-based approach to expatriate salary calculations have assignment policies that allow irregular or unscheduled salary reviews to manage significant changes in exchange rates or inflation. Given the volatility in the world economy in the past few years the need for this is not surprising, especially as companies expand into new territories. Of those companies that will carry out unscheduled reviews around two thirds respond on an ad hoc basis and the rest actively monitor conditions in their assignment locations.
High inflation does not always lead to a higher cost of living index, as we shall see. In such cases only 16% of organisations make any reductions to pay, allowances or indices based on the findings of the unscheduled check. However, an additional third will forewarn the assignee that there may be a reduction in specified allowances at the next scheduled review if current trends persist.
What do companies do with interim cost of living information?
High inflation in a host country
Companies use the updated cost of living data in a variety of ways. Most companies would implement a higher cost of living index where local inflation is rapidly eating into the purchasing power of the assignee. However, high inflation does not always lead to a reduction in spending power: countries with high inflation often also suffer from a depreciating currency which can well result in lower indices for more home locations. In this instance, some companies apply the lower index: they are still protecting the purchasing power of their assignees after all. On the other hand, most companies choose not to lower the index – letting their expatriates keep the ‘windfall’ but using the information to support any explanations they need to make that, despite the high inflation, the purchasing power has been more than protected in the host country.
Another complicating factor is how the salary is delivered. Companies paying in the home currency only may, as mentioned, find an assignee’s purchasing power is kept up as the host currency depreciates faster than prices rise. On the other hand, assignees paid in host currency only would be hit twice in this scenario: not only would they face high inflation in the host country, they would also be able to buy less home currency. For this reason, it is not advisable to pay only in host currency in an unstable or high inflation country. If a company splits pay between host currency and either a hard currency or the home currency it may be advisable to update the salary as well - although the effect of the exchange rate movements will be minimal the assignee will be losing purchasing power due to the high inflation just as any local would.
High inflation in a home country
So far we have only considered high inflation countries as the host country for assignees but the updated index information can be useful for companies sending staff out from these countries too. It is quite common, despite the high inflation at home, for indices out of these countries to rise since the inflation is more than counteracted by the currency depreciation.
In Argentina, for example, because of its high inflation, some of our clients update local salaries up to four times a year. This being so, they may well also wish to update their assignees’ salaries following the same schedule, using the updated base pay with updated price and exchange rate data.
Overview of December 2017 interim survey
Here is a summary of the changes we measured in the countries we surveyed in our last interim survey:
Inflation in Argentina remains high with prices increasing by around 5% since the September 2017 survey. The Argentinian peso has depreciated slightly against the euro and US dollar but gained against the Australian dollar and Japanese yen. As a result, exchange rate movements will be pivotal in determining index movements for expats in Argentina.
Democratic Republic of the Congo
Over the past three months, the Congolese franc has continued to depreciate a little against most major currencies. Inflation slowed since the September 2017 survey to be around 2% in the three months to December. The impact on indices for expatriates will be small and will depend on the relative effects of inflation and exchange rate changes.
Inflation has slowed slightly in Egypt recently with prices increasing by around 2.5% in the three months to December 2017. In this period the Egyptian pound depreciated a little against the British pound while remaining flat against the US dollar and the euro. As a result, relative exchange rate movements will be a significant factor in determining whether assignees see minor increases or decreases in their indices this survey.
Prices have continued to rise quickly between the September and December surveys, by an average of around 30%. The South Sudanese pound has depreciated against major currencies during this period, though not by enough to offset the high inflation figures. As a result, expats can expect to see higher indices in South Sudan.
In the three months since our September 2017 survey, prices in Sudan have increased by around 7%. Meanwhile, the Sudanese pound has depreciated slightly against most major currencies. In most cases, the increase in prices has offset the depreciation of the exchange rate so the majority of expats in Sudan will experience higher indices.
Since our December survey, the Sudanese government has proposed to devalue the currency and removed subsidies on bread which has sparked demonstrations across the country. These changes will likely result in even higher inflation over the coming months.
The Uzbekistani som has stabilised over the past three months following its devaluation in early September. Prices rose by around 6% during this period and consequently assignees in the country will experience higher indices.
Inflation in Venezuela continues to soar, with prices rising by more than 200% in the three months following the September 2017 survey. The commonly used black-market exchange rate continued to depreciate rapidly in the interim period, passing USD 1 = VEF 100000 in December. In contrast, the official DICOM rate remained relatively stable against major currencies and inbound assignees will see their indices rise massively due to the extremely high inflation.
Since the December survey the economic situation has continued to deteriorate and the currency to plummet in value, making everyday life very difficult for everyone in the country.
Getting your updated cost of living indices
As discussed above, not all companies will choose to apply an interim survey index but, for a global mobility team, having this data to hand is highly valuable since it enables them to deal confidently with assignees in high inflation countries who are questioning their buying power.
ECA subscribers should get in touch with their ECA contact indicating which indices they require, and they will be provided with the most up-to-date results.
FIND OUT MORE
Please contact us to speak to a member of our team directly.
ECA publishes cost of living data for 470 cities around the world. It is available from ECA in several forms, including in a calculator which includes clear explanations of the degree to which index movements have been determined by changes in prices and exchange rates. The Cost of Living Calculator is available as part of a data subscription.
Our Consultancy and Advisory teams can support you and your team with advice on cost of living, price changes and exchange rate management. To find out more, please get in touch!