Steps to Determine the Effect of Inflation on Your Salary and Control Your Expenses

Written By Steps To Faculty Published May 20th, 2010

Inflation is an increase of the average level of prices over time, usually measured annually. Currently, the rate of inflation for 2008-2009 was 3.5% and for 2009-2010 the rate was 3.2%. Although inflation happens slowly, its rate can increase at any time and tends to be disastrous for the economy. Recently, some economists argue that the real rate of inflation is now at 10%. In general, when the rate of inflation grows, higher salary increases is the end result. At the same time, the cost of living increases as well.

Inflation rate does affect our salary, but how to determine the effect of inflation on your salary is the question in everybody’s mind. If we could determine the effect of inflation on our salary, then we can plan our expenditure and savings accordingly. Let’s take a look.

Step 1 Use a calculator

Therefore, the best way to understand the inflation can be calculated by using the calculator CNN.Money.com. This tool was usually built to measure the inflation of pensions for seniors and as an educational tool for children, but can be used for any purpose.

Step 2 Look at the Consumer Price Index

Inflation is measured by examining the changes in the governments Consumer Price Index (CPI). Generally, economists note that the CPI changes over time. The CPI involves the price paid for a set of products, a representative list of the things that a person needs to buy on a regular basis, which usually includes food, clothing, medical costs, transportation, recreation, education and miscellaneous expenses. Therefore, for an average person, this list serves as a record for the raise and fall in various prices. After going through this, the CPI can only tell you whether a nation is suffering from inflation, but cannot tell who exactly would be affected in relation to salary. Hence, Step 3.

Step 3 Compare your salary from last year to this year

To determine whether your salary would be affected by inflation, you should know how much you were paid exactly a year ago and what is your salary now. You can also make comparisons about your purchasing power by comparing the prices of a product, for example, meat, one year ago and today. If you cannot afford meat as readily as you did a year ago, then although inflation has caused the prices of consumer goods to increase, your salary has not caught up with the rate of inflation. The reverse holds true. Generally, your salary increases since your employer must adjust your wages to meet the cost of living.

Remember, inflation is good and bad for the economy and for your wallet.


Roger Due

Investing in Your Destiny® & Coaching Program - Wealth Building Summit Dallas, Texas

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