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How Inflation Affects Your Paycheck

Learn how rising prices are likely impacting how far you can stretch your cash.

Carole Hodorowicz: Is it just me or is my paycheck not stretching as far as it used to?

Katherine Lynch: No, it's not just you. Prices have been on the rise for almost everything from groceries to transportation. The Department of Labor recently reported a key inflation tracker climbed 7% last year. That's the highest increase in almost 40 years.

Carole Hodorowicz:
So what does that have to do with my paycheck?

Katherine Lynch: It all comes down to something called purchasing power. When inflation is on the rise, but your paycheck isn't keeping pace, that means you can't buy as much as you used to. You've lost purchasing power.

Carole Hodorowicz: How do I find out how much power my paycheck has?

Katherine Lynch: You can calculate your real wage. Take a look at this chart showing inflation's effect on a $50,000 salary each year over the past decade. The pink bars represent inflation, and the blue bars are the real wage.

Carole Hodorowicz: What's real wage?

Katherine Lynch: Your real wage is your paycheck after accounting for inflation's effects. Take a look at 2021. You can see how inflation eroded a $50,000 salary to less than $47,000. This person's purchasing power fell drastically.

Carole Hodorowicz: So, let me know if I've got this right. If I see a pay increase, I'm all good then.

Katherine Lynch: You might not be. People tend to see about a 3% increase in pay each year. But with inflation at 7%, that's not going to cut it.

Carole Hodorowicz: Is it going to be like this forever?

Katherine Lynch: The hope is that inflation will cool off this year, but you can calculate your real wage using the Department of Labor's CPI inflation calculator.

Carole Hodorowicz: Wait. Who was that?