The salary inflation calculator gives you the answer to a practical question: is my salary keeping up with inflation? So use our wage inflation calculator to find out if your wage is keeping pace with inflation (see our inflation calculator for more about inflation).
Wage inflation calculator in practice
Inflation is the rate at which the general price of goods and services rises in a specific interval. To be able to buy the same amount of goods and services – in other words, to have the same buying power, your salary must grow at least at the same pace as inflation.
When the inflation rate is higher than your salary increase, you lose money in real terms. Therefore, you need to spend a higher proportion of your wages to buy the same goods, increasing your living costs.
When your salary grows at a higher rate than inflation, you gain money in real terms. Therefore, you can buy the same goods for a lower proportion of your wages, effectively enjoying a higher standard of living.
Economists often coin the altering real value of the money as the "money illusion". The key concept behind the money illusion is the difference between "real" and "nominal" prices. The nominal wage is your paycheck. The real salary is your paycheck adjusted for inflation. So, if you are used to a salary raise of 3% and suddenly your employer only grants an increase of 1%, you feel bad. However, if inflation was running at 3% when you got a 3% raise, you got no raise at all. Moreover, if deflation was running at 1% and you got a 1% wage hike, you actually got a 2% increase.
To sum up, the salary inflation calculator shows you what your salary is worth in real terms.
Are you curious about how inflation can affect other areas of your life? Check out our long-term care calculator to learn about how the future cost of long-term care is influenced by inflation.
How to use the salary inflation calculator
Probably the best way to introduce how this calculator works is to take a real-world example. In November 2018 year-on-year inflation rate was 2.2% in the United States, which means that the overall price level between November 2017 and November 2018 increased by 2.2%. If your monthly salary in November 2017 was $3,000 and in November 2018, it rose to $3,200 per month, you can calculate in the following way how your living standard has changed.
As a first step, to see what is the inflation-adjusted salary that exactly keeps up with the inflation rate, you can use the following formula:
Inflation adjusted salary = $3,000 × (1 + 0.022) = $3,066
To evaluate your actualized earnings you apply the following simple deduction:
Actualized earning - Inflation adjusted salary = $3,200 - $3,066 = + $134
If the resulting value is positive, you gain; if it's negative, you lose money in real terms. In the above example, the value is
+134, which is good news as it means that you have a gain: your earnings in November 2018 are worth $134 more.