Why can a higher salary buy less?
Purchasing power depends on salary and prices at the same time.
Short answer: what matters for your wallet is purchasing power, not the number on the pay slip. If prices rise more than the salary, a person earns more in currency terms and can buy fewer things. This is called a loss of purchasing power, or a fall in the real wage.
Nominal wage and real wage
The nominal wage is the written figure: how much you receive. The real wage is what that figure can buy once prices are taken into account. If the nominal wage rises 5% and inflation for the period is 8%, the real wage falls, even with a raise.
The most common reasons
- Inflation higher than the raise. The best-known case.
- A change of tax bracket. In systems with progressive rates, a raise can lift the rate on part of the income.
- Costs that rise faster than average, such as rent, health insurance or tuition.
- New expenses, such as children, loans or moving to another city.
An example
Ana earned $4,000 and got a 5% raise, going to $4,200. In the same year, the items she consumes most rose 8% on average. To buy the same basket that used to cost $4,000, she would now need about $4,320. Even with a raise, her purchasing power fell about 2.8%. This is an illustrative example.
Nuances
- Official inflation is an average; yours can be higher or lower depending on what you consume.
- A raise may come with different benefits or responsibilities.
- Losing purchasing power for one year does not mean losing it always; what matters is to look at the accumulated figure.
What to do with this
When negotiating a salary or evaluating an offer, compare the raise with the inflation of the period and with your real spending. Recording expenses for a few months helps you know your personal inflation.
