A 4% pay rise with 5% inflation: what happens to purchasing power?
The nominal increase in wages is not the same as the change in what those wages can buy. Compare the wage-growth factor with the price-growth factor for an exact calculation.
Inflation calculator →Use a ratio rather than only subtraction
The real change is (1 + wage growth)/(1 + inflation) − 1. Subtracting inflation from the pay-rise percentage is a convenient approximation for small changes, not the exact formula. Both inputs must refer to the same period. Mixing an annual pay rise with one month of inflation would answer a different and generally unhelpful question.
Translate the new salary into old prices
An annual salary of 50,000 rising by 4% becomes 52,000. If prices rise by 5% over the same period, that new salary has purchasing power of 52,000/1.05, approximately 49,523.81 in the original price basis. Relative to 50,000, the real change is approximately −0.9524%, slightly different from the −1% obtained by simple subtraction.
Keep the comparison’s scope consistent
This illustration uses gross salary and an assumed price basket. A household budget also depends on after-tax income, hours worked and personal spending patterns. Use a consistent definition of earnings when bonuses or allowances change, and avoid mixing price indexes from different regions or time windows. The calculators can verify arithmetic but do not determine whether a wage arrangement complies with employment law or supports a particular standard of living.
Try the calculators
- Inflation calculator
Explore changing prices and purchasing power.
- Salary calculator
Turn hourly pay into monthly and annual income.
- Percentage change
Measure the change between two values.