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Inflation and your pay

Why can a pay rise still leave you worse off?

Inflation is the speed at which prices rise. A little is normal: the Reserve Bank aims for 2 to 3% a year. What matters to your household is whether your pay rises faster or slower than prices.

Try different combinations. Notice how a gap of just one percentage point compounds over the years.

Prices rise each year by3.5%Your pay rises each year by3.2%For this many years5 yearsYour pay today$90,000

A $100 shop will cost: $119; prices up 19%
Your pay will be: $105,352; up 17%
What it actually buys: $88,703; 1.4% worse off

A pay rise only leaves you better off if it’s bigger than the rise in prices. Economists call the difference your real wage. When prices outrun pay, your dollars are worth less even though there are more of them.

These tools are simplified on purpose so the idea is clear. Tax figures use the current resident rates, the low income tax offset and the Medicare levy; they leave out other offsets, HELP repayments and the Medicare levy surcharge. They are not financial advice.