Inflation, NBA Contracts, and the Salary Cap

I was going to put this in the CJ and Nance Extension thread, but I decided to make it its own post. I am going to try to keep this from getting political, but one of the things that I don't see any "NBA cap experts" talking about is the current inflation rate.

This summer, we've the Consumer Price Index rise to go up 9% from the prior year. Now, some of that was caused by supply chain problems as a result of the pandemic, and some of it was the result of high gas and food prices as a result of the war in Ukraine, and some of those prices are already on the way back down, but we just got a report yesterday that US wage growth (which should lag the CPI in this situation) is up 5.2% year over year.

Here's why that matters: the cap would go up without inflation, as the NBA becomes more popular worldwide, the US population grows, etc. But higher inflation is going to result in a much higher cap than is currently being projected.

Let's look at what would happen to a "$30 million" number at 6% growth:

2022 - $30.0 million
2023 - $31.8 million
2024 - $33.7 million
2025 - $35.7 million
2026 - $37.9 million
2027 - $40.1 million

In other words, paying a player $30 million this year might be exactly like paying them over $40 million five years from now. That's how big a difference high inflation makes.

Another way to do the math is to go the other direction, and say that paying someone $30 million five years from now could be like paying them only $22.4 million today.

Most of us were too young to remember back when the US had sky-high inflation rates, so you don't know what it's like to factor inflation into every financial decision that you make, but inflation averaged over 7% per year from 1966 to 1981. I was seven years old when inflation peaked at over 13% in 1980. (Read this NY Times story about 90% inflation in Argentina if you want to get an idea of how bonkers life gets when inflation truly gets way out of control.)

Now, the Federal Reserve is raising interest rates to combat inflation, and most experts have been predicting US inflation to go back down to the 3-4% level next year, but I think that yesterday's wage report means that we are very much at risk of inflation becoming cyclical.

What does that mean? I'll give you an example. I own a small business, and I just recently had to set my prices for the coming year. I raised my prices not just to account for the amount my costs have gone up, but also by how much I expect them to go up in the coming year.

In other words, because I expect my costs to continue to go up, I raised my prices by more than I otherwise would have. And my business's price increase then contributes to even higher inflation. That's how inflation becomes cyclical.

Again, what prolonged higher inflation would mean for the NBA is that the salary cap will go up by much more than is currently projected. The teams that will benefit the most are the ones who lock in players for long periods in the current salary structure.

In other words, locking in Zion for five more years with no player option for the last year could be an extraordinary advantage. Getting BI to forego the player option could also be significant. Getting quality players on a rookie wage scale takes on a higher value. The Pelicans are set up extremely well for a high-inflation future.

The other area that this comes in to play is, as I hinted in the first sentence, with the extensions for Nance and CJ. If inflation stays up, then it might make sense to extend them now for longer than we might otherwise do. I'm not arguing for anything specific here; all this post is just food for thought.