How does inflation impact COLA?
With inflation continuing to be a global issue, let’s review some key areas that inflation can impact your global mobility program and ways to address them! Step one - let's take a look at the cost of living allowance (COLA).
Since COLAs are based on comparisons of prices in the home and host locations, high inflation can have a big impact on them and, therefore, on your assignees.
Some important items to remember:
COLAs are impacted by inflation at host AND at home. Price changes at home can offset changes at host. Assignees often forget about home inflation since they are not experiencing it.
High host inflation can still have a big impact on your assignees as rising prices at host can make the COLA feel insufficient.
Exchange rate is also a factor — Inflation drives exchange rate changes and exchange rate changes can drive inflation. Often, high inflation in the host will be offset or partially offset by weakening of the host country currency, so COLA changes can be muted vs. assignee expectations.
What can you do?
Keep up with the pace!
Review your COLA update schedule. Your data provider may be able to provide a more frequent update for volatile locations than your current schedule allows. AIRINC updates our allowances quarterly for volatile locations, so if you (or your data provider) have only an annual or semi-annual update, you could be lagging the market.
Make sure your assignees and business partners understand what the COLA is
intended to do, what it is not intended to do and, especially, how home and host inflation impact it. Additionally, ensure that they understand that exchange rates are also a factor, and they can be a counter-balancing factor to inflation.
Understand your pay approach
If you are paying in home currency, your assignees can be strongly impacted by differences between the market exchange rate and the rate used to calculate
the COLA. You may want to consider education or even mitigation steps. If you
are paying on a split or in host currency, your assignee’s host purchasing power is not at risk due to changes in the rate, but their savings and money on trailing
home expenses may be at risk if you are paying their salary fully in host and
the host currency is steadily depreciating vs. their home currency.
Download the full paper now for details on how inflation and currency fluctuations can affect your global mobility program, as well as concrete steps you can take to maintain your assignment allowances.
Interested to know more about how AIRINC tools can help you with your assignees' questions around their Cost of Living Allowance (COLA)?
AIRINC's COLA Change Report provides the explanations that you need through a transparent personalized report that reflects the changes in an assignee’s specific COLA and visually explains the reasons behind the change.