Choosing an Index

Last week I posted about the importance of being able to increase your prices in line with inflation. This week, I’m going to make some suggestions about choosing the index you should use.

Before I do that, a quick preface on how customers react to price increases. Here’s the view from Blue Ridge Partners: we asked survey respondents how their most recent price increase was received by customers. Not a single company said their price increase was unsuccessful, and companies with the largest price increases (10%–15% or more) received only modestly more pushback than companies with smaller increases.

In an ideal world, you will use an index which a) tracks your major costs, and b) is published regularly by a trusted source. If you are a tech company, your main cost is likely to be developer salaries and that’s the cost you want to track. Unfortunately, there isn’t a dedicated index for developer (or other tech salaries) published by a reliable source. Tech recruitment agencies often publish salary information but aren’t generally viewed as a reliable source. Government-published indices are viewed as reliable, but will generally lump developer salaries in with other sectors.

For example, the UK’s Average Weekly Earnings data (published as a dataset, rather than an index) has a Sector J Information and Communication, and within that includes computer programming, consultancy & related activities, but lumps this in with publishing, film and TV, telecoms, etc.

The same is true for the US Bureau of Labor Statistics which relies on even higher level groupings. For example, one of the categories tracked by the US BLS is private industry workers, and within this it tracks (for example) Management, business, and financial, and separately, Professional and related.

This doesn’t mean that these indices can’t be used, but it does mean that they are likely to overestimate or (more likely) underestimate any increases in developer salaries.

If these indices don’t work for you, then primary alternatives are going to be the general consumer price indices which are typically published by the local government. In the UK, that’s the CPI or CPIH (avoid RPI: it’s being phased out). Of the two, you should use CPIH: the h indicates that it includes owner/occupier housing costs which, if you are looking for a proxy for salary costs, is a key factor.

In the Eurozone, the equivalent is ECB’s eurozone HICP (Harmonised Index of Consumer Prices).

Here are some URLs.


ECB’s Eurozone HICP

US Bureau of Labor Statistics (private industry workers)

UK Average Weekly Earnings (EARN02)

In an ideal world, you will use an index which a) tracks your major costs, and b) is published regularly by a trusted source.