Sep 30, 2022Remote work16 min read
No, remote work is not causing inflation
Table of Contents
I.What is inflation, how is it measured and why is it so bad?
1. 1.Why is inflation so bad?
1. 2.What causes inflation?
1. 2. 1.Monetary policy
1. 2. 2.Cash influx
1. 2. 3.Supply/Demand Problems
1. 2. 4.Global factors
1. 3.What fixes (or can fix) inflation?
1. 3. 1.Rising interest rates
1. 3. 2.Reducing money supply
1. 3. 3.Open Market Operations (OMOs)
1. 4.Does remote work make inflation worse?
1. 4. 1.Why do people think remote work is causing inflation?
1. 4. 2.Is there any truth to these claims?
1. 5.Can remote work
1. 5. 1.Remote workers can combat the effects of inflation easier
1. 5. 2.Remote companies are also more resilient
If you’ve been paying attention to the news in the past few months (condolences), you’ve likely heard a lot about inflation. Regardless of where you live, the narrative and severity around the issue certainly differ from country to country. While it’s significantly worse in some areas than others, it’s a global problem. 40% of countries currently list inflation as their #1 concern (compared to a usual 14%).
What is inflation, how is it measured and why is it so bad?
What is inflation?
"Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country." - IMF
While this technical definition is vague, inflation is usually discussed in narrower examples, often in the categories of food, energy, housing and goods. Things that affect your everyday life. One might also notice that inflation is just a rate of increase, but not necessarily on a problematic level. Some inflation is wanted. We’ll dive into this a bit further in a moment.
For now, it’s important to note that countries typically measure the rise of this cost of living by surveying households and tracking those numbers over time. This is what you typically hear reported on the news, as the more general/abstract measurements from economists mean less to consumers (although they do affect the global stock market heavily as we’ve seen in recent months).
Why is inflation so bad?
As touched on above, there is usually some level of inflation happening. You definitely don’t want deflation, which is a clear indicator of a weakening economy. The U.S. government tries to target a 2% annual inflation rate, vs the 8%+ we have seen this year. So inflation is one of those things you want a little of, not a lot. And it’s not difficult to see why.
If the cost of your groceries, energy bill, housing or transportation increases by a large fraction, it’s effectively wiping income off your paycheck. For many people around the world, all 4 of these have skyrocketed at the same time. This is why inflation is so enraging to citizens and so horrifying to governments. This year alone, the list of countries that have seen protests over inflation is large. Pakistan, Zimbabwe, Belgium, Ecuador. Even the United States and Britain have seen protests directly linked to inflation. Governments are thinking short-term because of elections but the economy is a long-term game. This is why inflation can literally topple both empires and democracies alike.
Companies are also familiar with how deadly inflation can be. It leads to higher interest rates (more on this in a moment), which leads to lower spending. That means companies’ revenue starts to take a hit. It’s not just consumer companies either. The economic ripple effects of raising rates slows growth. This is intentional, but if gone too far it can lead to recession. It’s a tricky balance to walk, and not a favorable position to be in.
To make matters even worse, inflation is largely a psychological disease as well. Meaning, if people think inflation will get worse, it probably will by way of a self-fulfilling prophecy. Companies who think their cost of goods are going to continue to rise will more readily rise their own prices (if they think it’s temporary they might try to wait it out, but we are long past this currently). Individuals who grow fearful of uncertain economic times begin to act abnormally. People living paycheck to paycheck spend all their money as quickly as they can to avoid the devaluation of rising prices.
To make matters worse, inflation rarely reverses (with some exceptions like fuel prices, and possibly sectors like housing in certain areas). The goal is to slow inflation down to its usual rates. That means, in a best-case scenario, the prices simply stop rising so fast. They will largely not return to levels seen just a year or two ago.
What causes inflation?
It’s difficult to say for sure, even in a time like this with drastic global events and economic policy shifts, both of which are almost certain to affect inflation. For context, we’ll review some common ones.
In essence, low interest rates. Why do they cause inflation? In layman's terms, it makes borrowing money “cheap”, so people do it more. That puts more money into the economy, which in turn causes inflation due to the sudden shift in the supply of cash.
But have interest rates been low?
Yes, incredibly. In fact for much of the past decade, they’ve been at historic lows. There has not been such a high contrast between interest rates and inflation rates since the 70’s, another period of high inflation (and interestingly, very little remote work…)
The insertion of cash into the economy, often through excessive government spending in modern times, is also traditionally seen as a cause of inflation. This is somewhat controversial. You’ll find no shortage of people arguing over whether or not the pandemic stimulus packages, massive tax cuts and billions spent on loan forgiveness caused inflation.
What’s the logic? Imagine a small medieval village where on average each person has $10. If the king suddenly gives everyone $100, there is a significant increase in the amount of money in circulation. That means people in that village will be able to spend significantly more money on the same things, causing the merchants to raise their prices in turn. This is a not terribly oversimplified version of what happened in many countries during the pandemic, when governments gave out unprecedented stimulus checks and tax cuts to entire populations.
Many who are blaming inflation on remote work argue that stimulus packages and tax cuts don’t cause inflation because of the economic growth they produce. Indeed, this appears to be what the UK government is attempting with historic tax cuts (although the plan has been seen as so poor, even the IMF has had to call them out after their currency crashed). But a unique aspect of pandemic relief was that rather than spending this influx of money on goods and services, which would spark economic growth, it wasn’t spent at all. Many people in the west had more money than ever, but didn’t spend it in an economically “rational” way because of pandemic fears and lockdown restrictions. They saved it. We are starting to see some of this reverse, but it has little if anything to do with remote work.
Supply and demand is a great system when working in harmony, but less so with an imbalance. When there is a large shift in consumer demand for a product or category, prices will skyrocket. It’s simple: if there are 20 people who desperately want to purchase 3 cookies, chances are its price will go up dramatically (even if temporarily). We saw this happen with many goods throughout the past few years.
Is remote work to blame? Not really. Sure, people wanted to find bigger homes for better at-home offices. But much of this was driven by lockdowns. If it were the fault of remote work, we would have seen housing prices fall as people began returning to the office. Instead, we only saw market demand start to decrease once (you guessed it) when the governments started to raise interest rates.
So while there was certainly a massive increase in demand for large categories of goods (and a decrease in services), this was the fault of the pandemic and subsequent lockdowns, not remote work. Governments that made questionable decisions during the pandemic just needed a scapegoat for the current turmoil.
Related to the above category of supply, large global shocks can cause inflation. We saw the pandemic cause massive distribution bottlenecks, affecting the supply of goods (while demand was also being shifted in unhelpful directions). The war in Ukraine caused horrifying production stoppages of food. Even the breakdown of free trade can increase taxes on imports and exports.
These are all things we are facing in our global economy today, and likely will for a while longer.
What fixes (or can fix) inflation?
Not a lot, and that’s part of the reason why inflation is so difficult. Governments have just a few tools to use and they are unlovingly referred to as “blunt instruments”.
Rising interest rates
As touched on earlier, the most effective thing governments and banks can do to combat inflation is to raise interest rates. Somewhat ironically, they are trying to intentionally slow economic growth by making credit more expensive. The goal is to achieve what’s known as a soft landing – raise rates enough to bring down inflation to the target (2% in the United States), but not so much that you trigger a recession.
This is not easy to do. Some argue whether it’s even currently possible, although the U.S. federal reserve has some fun equations to try and achieve it.
Reducing money supply
In modern times, this is basically the same as raising interest rates.
Open Market Operations (OMOs)
This exciting term basically refers to buying and selling securities by the Federal Reserve.
"The infamous Federal Reserve balance sheet grows when the Fed buys securities and shrinks when it sells them. Buying securities promotes liquidity in financial markets and puts downward pressure on interest rates while selling securities does the opposite." - Source
In fact, we are now seeing the Bank of England starting to buy UK government bonds in an attempt to fix the turmoil caused by historic tax cuts earlier this month.
Does remote work make inflation worse?
Why do people think remote work is causing inflation?
The Reserve bank of San Francisco is claiming that the “work from home” movement accounts for more than half of overall home and rent price increases in the United States. The argument boils down to the trend of people wanting newer, bigger housing options to work from.
“Our results suggest that rising house prices over the pandemic reflected a change in fundamentals rather than a speculative bubble,” the authors wrote. “This implies that the evolution of remote work may be an important determinant of future housing costs and inflation.” - Source
A serious fraction of the municipal government of San Francisco’s income comes from property taxes and business taxes - 2 things that would not be looking good if the population of San Francisco decides to move to quiet towns to work remotely. They rely on large tech companies paying massive amounts of taxes, and bringing with them high-income residents who will do the same. And while the San Francisco Federal Reserve bank is supposed to be separate from these political leanings, their political makeup does not indicate this with a 25:1 ratio.
So it’s worth pointing out 2 things about the round of arguments claiming remote work is causing inflation:
- It’s mostly stemming from this one, rather biased, source
- It’s mostly referring strictly to the inflation of housing prices, as a single category with many other factors at play.
Is there any truth to these claims?
As pointed out earlier, it was actually lockdowns that drove the house increases. Cafes and co-working spaces were closed. And people didn’t just need a home office. 100% of their lives were taking place within the confines of their home for an extended period. They needed gyms, school rooms, and quiet spaces to relax. But that’s now changing, and interest rates are lowering demand. There is also little evidence to indicate that there is an ongoing mass exodus from cities. If anything, people want to work remotely from the city of their choosing.
On top of this, the data the article points to is from 2020-2021. It doesn’t take into account the massive economic corrections that have happened in the past year. This likely accounts for the fact that, while there has been a gradual return to the office in the past year, inflation still rises along with housing prices (until interest rates began to climb). These climbs have also stayed high in both cities and rural areas, indicating that only certain municipalities are at risk.
So while no one can say for sure what exactly caused our current inflation, remote work does not seem to be a primary culprit.
Can remote work help with inflation?
Remote workers can combat the effects of inflation easier
People who work remotely and have the freedom of mobility are less vulnerable to large shifts. They are not forced to put up with unaffordable housing within commuting distance of an office. They are not susceptible to rising commute costs. They can choose where they work from, allowing them to optimize their own space and costs.
Inflation or not, remote work is generally cheaper as a lifestyle. You don’t have to pay for office clothes or your commute, and there is less socially mandated eating/drinking out. Remote workers can chase a cheaper cost of living. Cooking meals at home costs less than getting takeout for lunch. Utility costs may go up if one decides to set up a home office, but even this is under control to an extent. Many companies offer stipends and pay for co-working spaces to offset the cost (after all, they are saving quite a lot). Parents are realizing they don’t need to spend as much on childcare services as before.
Some global remote companies will even allow their employees to choose what currency they get paid in. This allows people living in or from countries with unstable currencies to be paid in a stable one.
Remote companies are also more resilient
When the pandemic hit, many office companies were left with useless large spaces that they had signed lengthy leases on. Even now, companies going back to the office are finding they don’t need as much space. Remote companies don't have to worry about this massive overhead cost. When inflation rises and run rates become tighter, remote companies don’t have to worry about rent and utilities. They also save on talent. A $100k salary may not be a lot in San Francisco, but it can be a great salary for someone living nearly anywhere else. A startup that might not yet be able to afford a top-tier engineer in Silicon Valley could afford to pay someone well on the global market. Remote companies are also better at retaining talent, saving themselves from massive turnover expenses.
And separate from whether or not remote work has had an effect on inflation, one thing is clear in times of inflation and economic crisis: whether you are a company or a worker, it’s best to be remote.
About the author
Head of Growth
Sam Claassen is the Head of Growth at SafetyWing and a serial advocate for remote work. A longtime nomad himself, he has been to 65 countries while doing growth and remote work consulting for startups and accelerators. Through his work at SafetyWing, he is working with a team to create BuildingRemotely.com – a podcast, online resource and soon to be book on building a thriving remote company.