How Inflation Affects Your Paycheck

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Record inflation rates are affecting both consumers and businesses. Investopedia defines inflation as “a rise in prices, which can be translated as the decline of purchasing power over time. The rate at which purchasing power drops can be reflected in the average price increase of a basket of selected goods and services over some period of time. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.” The rate is calculated by the U.S. Bureau of Labor Statistics and is reported monthly.

Some workers receive cost of living increases to account for this reduction in buying power. In an ideal world, average wage increases would be equal to the rate of inflation. If your paycheck is increasing at a rate lower than the inflation rate then you are losing buying power, effectively a decrease in wages.

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