THE IDEA IN ONE LINE
More pay helps when prices rise less.
Some of your pay rise goes to higher bills.
$40 leftfor other purchases, after covering the old budget
Your pay goes up. That sounds like more money for the things you want. But if everyday prices rise too, some of that extra money is already spoken for.
The useful question is: can your new pay buy more than your old pay?
A simple monthly budget
Imagine you used to receive $2,000 a month. Your pay rises to $2,100. That gives you an extra $100.
To keep this example simple, imagine your old monthly shopping and bills used up the whole $2,000.
Buying exactly the same things now costs $2,060. Prices have used up $60 of your pay rise.
After covering that old budget, you have $40 left. You can afford a little more, but not the full extra $100.
Compare your pay with what the same things cost now.
What “buying power” means
Buying power is simply what your money can buy. A bigger number on your payslip does not always mean a fuller shopping bag.
In our example, pay rises faster than prices. Buying power improves a little.
Three possible outcomes
- Pay rises faster than prices: you can afford more.
- Pay and prices rise together: you roughly keep up.
- Prices rise faster than pay: the same purchases become harder to afford.
These comparisons assume your hours, taxes and shopping habits stay the same.
Use the same dates
Compare this year's pay with this year's prices. Comparing a monthly pay change with several years of price rises would mix different periods.
Your rent, travel and food may also change differently from a national average. This example explains the idea; it does not measure your personal budget.
Optional: see the calculation
Pay rises by 5%, while the old basket of monthly expenses becomes 3% more expensive.
$2,100 − $2,060 = $40 left for other purchases
(1.05 ÷ 1.03 − 1) × 100 ≈ 1.94% more buying power
The $40 is money available at today's prices. The 1.94% figure compares buying power with the starting year. They describe the example in different ways.
Source: U.S. Bureau of Labor Statistics: adjusting earnings for prices.
All amounts are hypothetical. We assume an unchanged shopping basket, hours and taxes. The dollar amounts are illustrative, not a claim about a real household.