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I'm not sure where to ask and, since this is not Personal Finance, I'm gonna ask it here.

Here's my situation: for the past 2 years, I hired and trained a team of Filipino workers. They are paid in USD and receive a 8% raise every year and x% for inflation. The workers then take their pay and exchange it for PHP.

When I came up with the analysis 2 years ago, I used the inflation data for Philippines to figure out the yearly inflation raise.

However, this year's inflation rate was 5.5%, which is ungodly high IMO; which got me thinking. Then, it occurred to me that I should have used the US Inflation rate the whole time!

My logic is that, if the price of goods increase in the Philippines, it wouldn't matter because the USD to PHP exchange rate would change so that US$1 would be worth more Pesos. If I recall correctly, Russian was experiencing a lot of inflation a few years ago. The price of the Ruble dropped; so, if Russian employees were paid USD, they were safe from the inflation, even if they exchanged their money every pay period.

Is this logic correct? Let me know. I gotta fix their pay.

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  • $\begingroup$ I hope the part of the question that asks: how should this be setup initially fits here. How to implement this new policy should probably go to Workplace.SE. $\endgroup$ – Bob Jansen Jan 14 '19 at 6:26
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    $\begingroup$ "I should have used the US Inflation rate the whole time!" This depends on what your goal is, and also on where they spend their income. $\endgroup$ – Giskard Jan 14 '19 at 8:58
  • $\begingroup$ If your goal is to increase their PP by 8% in local currency the first factor you should take into account is thr FX rate. Look at how it changed year on year and use this as basis for your calculations. FX rate is supposed to account for relative inflation (at least when the differential is high between the 2 currencieis) $\endgroup$ – Ezy Jan 14 '19 at 13:33
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Your employees are at risk of PHP inflation; you are not, so you should be paying in USD, and adjusting for USD inflation if you want to.

Yes your reasoning is correct. If you increase their pay by US inflation, in theory the exchange rate to PHP should increase MORE due to the higher PHP inflation (relative to USD). So when they convert their USD to PHP, their resulting PHP income would reflect PHP inflation.

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  • $\begingroup$ The economic theory which predicts this result is the Relative PPP theory. en.wikipedia.org/wiki/Relative_purchasing_power_parity $\endgroup$ – Alex C Jan 14 '19 at 19:30
  • $\begingroup$ Thanks for shoing me what Relative PPP is. It's a great help. @D Stanley, we (the company) exchange salary and benefits above what's normal for loyalty and trust. The employees use this loyalty and trust to take care of problems before they become big problems. They also don't quit and it makes life a lot easier on the managers :) Being a cheap, stingy company will just make your life harder since your followers will hate you (behind your back of course). I hope this helps you out, buddy. $\endgroup$ – MoneyBag Jan 18 '19 at 20:47

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