Your Raise Was Actually a Pay Cut
You're earning more and affording less. There's a word for that.
You’re reading Monday Morning Economist, a free weekly newsletter that explores the economics behind pop culture and current events. You can support the newsletter by sharing it or by becoming a paid subscriber to help it grow:
You’ve been doing everything right and somehow falling behind. The grocery run last week cost more than it used to, even though you’re buying roughly the same stuff you always buy. Your landlord just sent notice that rent’s going up the next time you renew your lease. And the raise you got earlier this year? It doesn’t quite cover it all. Your paycheck looks a little better each week, but your bank account doesn’t agree.
You’re not bad with money. You’re experiencing something that has a name and a long history of making people feel exactly the way you feel right now.
You’re not imagining it
And you’re not alone. CNN’s most recent polling found that cost of living is now the number one financial stressor for Americans. Not debt. Not job security. Not saving for retirement. Just the basic, grinding cost of being alive: groceries, gas, rent, and all the other stuff you can’t opt out of.
And it’s not just hitting the people you’d expect. Upper-middle-class households are supposed to be the ones with breathing room in the budget, but they report the same squeeze. When people who earn six figures start saying they feel like they’re falling behind, something structural is going on.
Prices going up isn’t new. Prices almost always go up. That’s normal. What’s not normal is prices going up faster than paychecks. People don’t immediately panic when a gallon of gas costs more than it used to. They panic when their paycheck doesn’t stretch far enough to cover it. The real problem isn’t that things cost more, but rather that your wages haven’t kept pace.
So let’s talk about what’s actually happening.
How we measure the invisible
I know you’re tired of hearing about inflation. We all are. But to figure out whether your wages are keeping up, we need to know what prices are doing first. So bear with me.
A few weeks ago, the government reported that consumer prices rose 3.8% over the past year. That’s the headline number that shows up in news alerts and cable news chyrons. And despite the fatigue, people have noticed. Search interest in “inflation” has surged to levels we haven’t seen since prices spiked in 2022, a sign that this isn’t background noise anymore.
That 3.8% comes from a tool called the Consumer Price Index (CPI), which is essentially a giant shopping list. Every month, the Bureau of Labor Statistics tracks the prices of hundreds of goods and services and bundles them into a single number that represents how expensive life has gotten compared to a baseline year. It tries to capture the cost of being a regular person. But because it’s an average, it can hide as much as it reveals.
It turns out that some things actually got cheaper over the past year. Eggs, after their infamous price spike, have come back down. Smartphones cost less than they did a year ago. Books and butter, too. If you happened to spend your money exclusively on those things, you’d think the economy was doing great.
But you don’t. You also pay rent, which is up. You buy gas, which is way up. You pay for childcare, for insurance, for the electric bill. And even the “core” inflation number, which strips out volatile food and energy prices to get at the underlying trend, rose 2.8%, up from the month before. The stuff that fluctuates is expensive. The stuff that doesn’t fluctuate is also expensive.
Justin Wolfers over at Platypus Economics recently published a chart that captures this beautifully: a long, detailed breakdown of every category, showing which items went up, which went down, and by how much over the past year. While its focus was on refuting claims from the White House that things are getting better, it also highlights the range of products the BLS tracks to get to that 3.8% headline.
Your personal inflation rate depends entirely on what you spend money on. And for most people who spend most of their money on rent, driving, eating, and existing as regular adults, the number that matters is well above 3.8%.
This is what economists mean when they talk about purchasing power. It’s the gap between what a dollar is supposed to be worth and what it actually gets you at the register. The ten-dollar bill in your pocket buys you less lunch than it did a year ago. The bill didn’t change. The lunch did.
Now, let’s talk about why all of that matters for your paycheck.
The hidden pay cut
So if prices are moving in a hundred different directions at once, how do you know whether your paycheck is keeping up? You probably have a sense of your own situation, and whether your last raise felt like a step forward or just treading water. But how do you know if that’s just you, or part of something bigger?
This is where a concept called real wages comes in. That’s a technical-sounding phrase with a very untechnical meaning. It’s also the concept that explains why you may be earning more each week and affording less at the grocery store.
Start with the number you can easily see, which we call your nominal wage. If you made $50,000 last year and you make $51,000 this year, your nominal salary went up by two percent. Congratulations, on paper. But here’s the catch: if prices rose 3.8% over that same period, your two-percent raise didn’t move you forward. It moved you backward. Your real wage measures what your paycheck can actually buy each week, and that number has fallen. Any bump in pay less than 3.8%, and you’re behind.
A few weeks ago, the Bureau of Labor Statistics put a number on exactly how far behind the average American has fallen: real average hourly earnings fell 0.5% from March to April alone. Over the full year, real average weekly earnings dropped from $386.80 to $386.02. That drop may seem small, but consider that over an entire year for every worker in the country. That’s $52 per worker over the past year. It’s not a rounding error for families already stretched thin.
It can feel like a contradiction to earn more money and afford less. But it’s not a contradiction. It’s just two different ways of counting the same money. Nominal wages measure what your employer pays you. Real wages measure what the economy lets you keep.
And the broader picture isn’t encouraging. The personal savings rate is as low as it’s been since the pandemic recession, and credit card spending is through the roof. You might think that signals a recession on the horizon, but the economy is actually growing, even after accounting for inflation.
The problem isn’t that the pie is shrinking, but rather who’s getting a slice. The share of national income going to workers has sunk to its lowest point since 1947. We may collectively be cashing in more dollars than in the past, but those dollars aren’t spending like they used to.
Final Thoughts
You may have noticed that this wasn’t an article about policy. There are loud, ongoing arguments about what causes inflation, what should be done about it, and who deserves blame. You’ll hear plenty of those. This is about something simpler: having the right vocabulary for what you’re experiencing.
Once you understand the split between nominal and real, you start noticing it everywhere. Not just in your paycheck, but in the news, in political promises, in job listings that advertise a salary without mentioning what that salary actually buys in that area. I hope that you’ll hear “wages are up” and think, up compared to what? The next time you get a 3% raise, you’ll instinctively check it against the inflation rate.
But I didn’t write this post to make you cynical. I want you to be critical. The economy is full of numbers that sound good at first but tell a different story with context. The numbers we see most often, like prices, salaries, and GDP, are nominal by default. The real versions take an extra step to find, and now you know to take that step.
So, the next time someone tells you the job market is strong because wages are up, you’ll know the follow-up question: Up in which sense?
It’s a small question. But it changes how you count.
The best way to fight bad economic math? Better economic literacy. If this piece gave you a sharper way to read the world, pass it along. Share Monday Morning Economist with a friend who deserves the same upgrade.
66% of U.S. adults said inflation is a very big problem facing the nation, up from 63% last year [Pew Research Center[
Among those workers earning household incomes of $150,000 or more, 57% say their wages aren’t keeping up [CNN]
61% of Americans say the economy is getting worse — the largest share of Americans to say this since 2022 [YouGov]
The overall share of middle-class households that do not make enough to afford basic necessities where they live ranges from 23% to 57% [Brookings Institution]
Average gasoline prices are above $4.50 per gallon, while diesel prices have nearly doubled [AAA]
"I didn’t write this post to make you cynical."
Waaaaaaay ahead of you
Jadrian- I read this: "You’re experiencing something that has a name", and I avidly read the rest of the article, which was really depressing, but economics is the dismal science, so OK. But what is the name? I was hoping for something snappy. There is an existing term "Shrinkflation". I kinda like "Inflation Evaporation". If you're looking to name Our Time In the Economy, you could go for "The Raise Recession". A high-falutin' Econ term might be "Nominal Illusion". But maybe my fave is referring to the wage increase that isn't: "Phantom Raise".