Is your raise really a raise? Pay rises against inflation

A raise is a real raise only if your pay grows faster than prices. The exact test is real change = (1 + raise) ÷ (1 + inflation) − 1. A 5% raise with 3% inflation gives a real gain of 1.94%. A 2% raise with 4% inflation is a real cut of 1.92%, even though the number on your payslip went up.

Pay raise calculatorWhat is my pay after a raise?Do it free

Nominal and real pay

Nominal pay is the number you are paid, in the money of the day. Real pay is what that number buys, compared with prices. Prices are tracked by a consumer price index (CPI), which national statistics offices publish regularly. To test a raise, look up the CPI change over the last twelve months for your country and use it as the inflation figure.

The exact formula, and why subtraction is close

A raise multiplies your pay by a factor: 5% means × 1.05. Inflation multiplies prices by its own factor: 3% means × 1.03. Dividing the two tells you how much your pay grew in the units of last year's prices.

The common shortcut is to subtract: 5% − 3% = 2%. That is close but not exact, and the gap grows as the numbers grow. The exact figure is 1.05 ÷ 1.03 − 1 = 0.0194, or +1.94%. A 20% raise with 10% inflation shows the gap clearly. The shortcut says 10%, but 1.20 ÷ 1.10 − 1 is 9.09%.

Worked examples

5% raise, 3% inflation: 1.05 ÷ 1.03 − 1 = +1.94%. A real gain.
2% raise, 4% inflation: 1.02 ÷ 1.04 − 1 = −1.92%. A real loss.

In money: take a salary of $50,000 with a 5% raise. It becomes $52,500. With 3% inflation, $52,500 buys what $50,970.87 bought a year earlier. The real gain is $970.87 in last year's money, which is 1.94% of $50,000.

Turning a percent into money

Work in amounts, not percentages.

Per year: $50,000 × 5% = $2,500 more, so $52,500.
Per month: $52,500 ÷ 12 = $4,375, against $4,166.67 before. That is $208.33 more a month, before tax.
Per hour: a 40-hour week over 52 weeks is 2,080 paid hours. $52,500 ÷ 2,080 = $25.24, against $24.04 before. That is $1.20 more an hour.

Use the hours you are actually paid. Part-time work, unpaid leave or a different number of weeks changes the result. The salary converter moves a figure between hourly, monthly and yearly amounts, and the percentage calculator gives the percent and the amount for each step.

Percent of what

A raise is a percentage of something, so ask what. A 5% raise on base pay is not 5% of total pay when the total includes other money.

Take base pay of $50,000 and a bonus of $5,000, for a total of $55,000. A 5% raise on the base adds $2,500, and the bonus does not change. The new total is $57,500, which is a rise of 4.55% on the total, because 2,500 ÷ 55,000 = 0.0455.

If an offer is quoted as a percent, confirm the base it applies to, and whether bonus, allowances or pension contributions are included.

Before tax, and tax rules differ

The figures in this post are before tax. Income tax, social contributions and other deductions take a share of any raise, and the share depends on where you live and on your tax band. Some systems tax extra income at a higher rate once it crosses a threshold. Bonuses and allowances can follow different rules. For the net figure, use your country's tax rules, or ask your payroll team for an estimate.

Prepare the number before you ask

Write down your current figure: yearly base pay, and the hourly equivalent.
Write down the figure you want, and the percent that gets there: (target ÷ current − 1) × 100. Going from $50,000 to $55,000 is a 10% rise.
Look up the CPI change for the last twelve months in your country, and work out the real change of the raise you are asking for.
Turn the percent into money per month and per hour, so the number is concrete.
Make the request as an amount, with the reason, such as extra work you have taken on or a market rate you have checked.

Edge cases

Pay and costs in different currencies. If your pay is in one currency and most of your costs are in another, use the inflation rate that matches the money you spend.
Part-time and variable hours. Convert the raise with your actual paid hours over a typical year, not the hours in your contract alone.
Several raises. Two raises in a row multiply: 1.05 × 1.03 is 1.0815, an 8.15% total, not 8%.