Understanding real wage growth after inflation

When a Raise Is Actually a Pay Cut

A 3 percent raise in a 5 percent inflation year is a real pay cut of roughly 2 percent. The salary number rose but what it buys fell. This is the 2022-2023 experience for many workers — nominal raises of 3-5 percent while inflation ran 6-9 percent — despite feeling like raises, they reduced real purchasing power.

The Fisher Equation

Real rate = (1 plus nominal rate) divided by (1 plus inflation rate), minus 1. This is the Fisher equation and is the accurate way to compute real returns. A common shortcut — nominal minus inflation — is close but loses accuracy at higher rates. This calculator uses the full Fisher equation.

A worked example

Try the defaults: current salary of 60,000, nominal raise of 3, inflation rate of 5. The tool returns -1.90%. You can adjust any input and the result updates as you type — no submit button, no reload. That's the real power here: seeing how sensitive the output is to one or two assumptions.

What moves the number most

The result responds to Current Salary, Nominal Raise %, and Inflation Rate. The rate and the time horizon usually dominate — compounding means a small change in either reshapes the final figure more than a similar shift in contribution size. Test this by doubling one input at a time.

The formula behind this

Applies the Fisher equation to compute real raise from nominal raise and inflation. New nominal salary is current salary times (1 plus nominal raise). New real salary adjusts nominal back to today's purchasing power. Everything the calculator does is shown in the formula box below, so you can check the math against your own spreadsheet if you want.

Reading the real figure

The real value is what your money actually buys, after inflation. That's the number that matters — the nominal total is just the flattering headline. Pay more attention to the inflation-adjusted result when the horizon is long.

What this doesn't capture

Inflation is an average across the economy; your personal inflation rate depends on what you buy. Housing, energy, and food can move very differently from headline CPI. Consider the assumption you enter as a starting point, not a guaranteed path.