For the first time since 1980 the U.S. rate of inflation is higher than the average total salary budget increase. During the 12-month period ending April 2011 inflation, as measured by the Consumer Price Index, was 3.2 percent. That compared to a total salary budget increase of 2.8 percent for the same period. Source: “WorldatWork 2011-2010 Salary Budget Survey.”

Why haven’t pay increases kept up with the rate of inflation? A host of factors–particularly high unemployment–are conspiring to keep salary increase budgets low.

“Salary budget planning does not happen in a bubble,” explained Don Lindner, CCP, senior compensation practice leader for WorldatWork. “Labor costs, productivity, unemployment, and other economic factors are important considerations for compensation professionals when making budget recommendations.”

Despite rising prices for goods and services, evident in the CPI, the demand for labor is still uneven, with the nation’s unemployment rate averaging 9.4 percent from May 2010 to April 2011. Salary budget increase trends may only see significant improvement if unemployment decreases, which would put pressure on employers to raise wages in order to stay competitive. “Successful organizations will not pay more than necessary for any expenditure, and with low risk of losing employees to other organizations, higher increases are not justified at this time,” explained Lindner. “This also explains why hardly any companies are making up for past pay freezes in this year’s budget.”

“Time will tell if salary budget increases will return to pre-recessionary levels, but hikes may only occur if the weight shifts between the supply and demand for labor,” said Alison Avalos, research manager for WorldatWork. “Mining, quarrying, oil and gas companies are currently experiencing a shortage of skilled labor so their 2012 planned salary budgets are above average, at 4.1%.” U.S. employees in other industries, on the other hand, can expect average pay increases of 2.9% in 2012.