How to Calculate Pay Increase Based on Inflation
The following are the steps to calculate a pay increase based on inflation.
Step #1: Get the 12-month rate of inflation from the Consumer Price Index (CPI). As of this writing, the 2023 12-month inflation rate was 4.1%.
Step #2: Convert the percentage to a decimal by dividing the rate by 100 (4.1% = 4.1 ÷ 100 = 0.041).
Step #3: Add one to the result from Step #2 (1 + 0.041 = 1.041).
Step #4: Multiply your current pay by the result from Step #3, which will give you your inflation-adjusted salary.
Step #5: Subtract your current pay from the result in Step #4, which will give you the CPI increase amount.
Example: If your current annual salary is $50,000, and the 12-month inflation rate is 4.1%, your salary adjusted for inflation would be $52,050 (50,000 × 1.041 = 52,050), which would make the CPI increase amount $2,050 ($52,050 − $50,000 = $2,050).
So your cost of living pay increase for 2023 should have been $2,050. Anything less would yield a net loss of purchasing power, which might only be the tip of the iceberg (see Real Inflation Rate further down the page).
Actual Pay Increase Percentage Calculator
If you've already received your raise, use the following mini calculator to calculate what percent your pay increased by (numeric characters only).
The Real Rate of Inflation
If you've ever felt like you're working harder and harder only to be able to afford less and less, you might consider the possibility that the government's inflation rate is being manipulated down to keep you thinking you can stay ahead of it.
While the government reports inflation to be 1% to 2% in most years, non-government entities estimate the real inflation rate to be 7% to 13%. Or, as in the case of 2023, when the government reported 4.1% inflation, the real inflation rate was estimated to be 7% - 15%.
In 2023, if you went to buy a house, pay your newly increased rent payment, buy lumber, book a flight, book a hotel room, fill up your gas tank, pay your heating bill, or buy a dozen eggs, it didn't take a rocket scientist to figure out that the inflation rate was much higher than the stated 4.1%.
So why would the government underreport the inflation rate? Some suggest it's because the government knows that we would revolt if they were to raise our income taxes to fund their bogus wars and disincentivizing entitlement programs. Others, like the author of the following Business Insider article suggest:
If people knew the actual inflation rate, it would implode the entire system
In either case, ever since the US government stopped using gold to back its paper money (1971), they've been free to increase the money supply whenever they wanted. This effectively allows the government to secretly tax us by forcing us to pay higher purchasing costs due to the inflation they caused.
And then what does the government do to offset the damage their printing press creates? They raise interest rates to lower the inflation rate. And who pays for that? We do, in the form of the higher costs we have to pay to borrow the money we need to buy what we can no longer afford to pay cash for due to inflation.
Of course, since the poor and middle class don't have access to investments that can yield returns higher than the real inflation rate, the rich get richer while the poor and middle class get poorer.
Wouldn't it be nice if there was a form of money that the government could not deflate? One that forced our government to live within their means and to use creative problem solving like we have to do?
Well, I was recently shocked to learn there is such money! And it's been quietly growing in support and adoption since 2009 (over 100 million adopters and growing).
If you haven't guessed what it is and would like to find out more, check out my video/text on my About Me page:
My Story, Part 5: The Biggest Aha! Moment of my Life
Hint: Will you choose the blue pill or the orange pill?
What or Who is Eating Away at Your Buying Power?
I often hear people complain about how inflation is forcing them to earn higher and higher incomes to maintain their current lifestyles.
Many of these same people make big-ticket-item buying decisions faster than I decide what I'm going to wear to work (I work at home!).
Plus, between mortgage, loan, and credit card payments, most spend hundreds, even thousands of dollars a month on interest charges.
When you spend a dollar to pay interest charges, what do you have to show for it?
The item you purchased on credit?
No! Because had you purchased the item with cash, you wouldn't have incurred any interest cost at all.
Therefore, you have nothing to show for the dollar spent (actually less than nothing if you consider the lost interest earnings).
Does Your Bank Have Carry-Out Personnel?
Pay a visit to your local lending institution (usually recognizable by being one of the nicest buildings in town).
When you enter the building, try to find a physical product to purchase that isn't just a signed document.
Can you find an assembly line churning out tangible products?
Can you find a Lay-Away counter?
Are employees hanging around the front door to help you carry out your purchases?
Of course not.
Lending institutions rent the use of your money for a small fee and then rent it back to you at a much higher fee. That's it. That's all they do!
The truth of the matter is that spending a dollar in interest only leaves you with one less dollar to spend (or invest). In other words, that dollar's buying power was reduced by 100%!
You worked just as hard for the interest dollar as the other dollars you earned, yet you received nothing in return for it. Doesn't that bother you? As you can tell, it bothers me ... a lot!
The buying power bottom line? If you are one of those people who fail to fully investigate buying alternatives before you make your buying decisions, or you are paying hundreds or thousands of dollars in monthly interest charges, I'm sorry, but your spending and borrowing are your buying power's worst enemy, not inflation.