Salary Inflation Calculator
What is Salary Inflation?
Salary inflation is a crucial concept that aids individuals in understanding whether their earnings are keeping focus with the overall rise in price levels, more commonly known as inflation. It essentially asks: is your salary keeping pace with inflation?
Inflation speaks to the rate at which the general cost of goods and services increases over a specific time interval. Therefore, to enjoy the same buying power or to be able to purchase the same amount of goods and services, your salary should ideally grow at the same rate as inflation.
Consider two scenarios:
If your salary increase is less than the inflation rate, you will essentially be losing money in what is known as real terms. This means that to afford the same goods and services, you will need to spend a larger percentage of your earnings, thereby increasing your overall costs of living.
Conversely, if your salary grows more than the inflation rate, you will be gaining money in real terms. This allows you to afford the same goods for lesser proportion of your earnings, enjoying a higher standard of living in the process.
These scenarios tackle the "money illusion" which focuses on the difference between "real" prices (adjusted for inflation) and "nominal" prices (your paycheck). If you see your salary raise decrease from 3% to 1%, you may feel a pinch. However, if the inflation rate was at 3% during your 3% raise, in reality, your raise was nullified due to inflation. In cases where deflation is at 1% and you receive a 1% raise, you effectively enjoy a 2% increase.
How to use the Salary Inflation Calculator?
Here's how you can use the salary inflation calculator without naming the website per se.
In order to best understand the use of this calculator, let's consider a practical, real-world example. Let's say the year-on-year inflation rate in November 2018 stands at 2.2%. This indicates that the overall price level between November 2017 and November 2018 has risen by 2.2%. If your monthly earnings in November 2017 were $3,000 and in November 2018, it rose to $3,200 per month, you can calculate how your standard of living has changed as outlined below.
As a first step, you need to find the inflation-adjusted salary that matches up with the inflation rate. The following formula will aid in this:
Inflation adjusted salary = $3,000 × (1 + 0.022) = $3,066
Next, to evaluate your actual earnings, use the following simple deduction:
Actualized earning - Inflation-adjusted salary = $3,200 - $3,066 = + $134
If the resulting figure is positive, you have gained money in real terms. If negative, it indicates a loss in real terms. In the example above, the value is +$134, which implies a gain: your earnings in November 2018 are worth $134 more in real terms.
By understanding salary inflation and using a salary inflation calculator effectively, you can make more informed decisions about your earnings and spending.