How Inflation Can Affect Your Paycheck (and What You Can Do About It)

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As a result of supply chain issues, the war in Ukraine and COVID-19, inflation hit a four-decade high in March 2022 of 8.5 percent. Your next (logical) question: How that inflation can affect your paycheck. We caught up with Brittney Castro, a certified financial planner at Mint, to talk through the impact.

First, What Is Inflation?

Inflation means the loss of purchasing power over time. In other words, as the dollar loses its value, the money spent on goods and services tomorrow won’t stretch as far as it did today.

We’re used to seeing inflation on everyday goods like a gallon of milk or the cost of gas, but inflation also wreaks havoc on the services we rely on to live our lives (think utilities like electricity, the cost of healthcare and more).

While an annual inflation rate of around two percent is pretty standard and a good thing (it allows businesses to make small adjustments in an ever-changing economy without going under), an inflation rate of 8.5 percent can dramatically affect how we live and how far our paychecks go.

Sometimes inflation is caused by a hot economy—people have surplus cash, which allows businesses to increase their prices due to customer’s willingness to spend—but it’s also the result of necessary goods in short supply.

In this current case, it’s a combination: COVID-19 caused supply chain issues, but consumers coming out of lockdown also had time to build up their cash reserves, which means they don’t have a problem meeting the inflation-related influx on things like rent or a new car (at least for now). This combination allows price hikes to maintain.

Here’s How Inflation Can Affect Your Paycheck

This is where inflation gets tricky. Per Castro, if your salary, whether you’re paid annually or hourly, doesn’t reflect changes in inflation, you’re losing money. “Inflation averaged about 2 percent annually for the last 10 years,” she explains. An annual cost of living increase to reflect that became standard in paychecks and allowed an employee’s purchasing power to, for the most part, remain the same. But if this 8.5 percent isn’t factored into your compensation, you lose the ability to make financial progress, which, long-term, sets you back.

So what can you do? Negotiate. Most businesses don’t like to refer to annual raises as inflation-based, Castro says. In a perfect world, a cost of living increase would be factored separately from changes based on merit. But recent research has shown that fewer employers are considering inflation when it comes to their annual salary budgets and instead base raises exclusively on merit and pay fair market value for various roles. Your best defense as you approach these conversations? “Ground your desired income in the market value of your role and the value you bring to your company,” Castro explains.

In addition, don’t be afraid to mention inflation. “Bring quantitative examples of how you’ve proven your worth, bolstered revenue and generated success as the main reason you deserve a change in comp,” Castro says. But it’s also OK to tell your manager that your raise request is also based on the sky-high inflation rate. Have a percentage in mind that accounts for both and if they can’t meet it, have backup requests at the ready (things like an annual bonus, increased time off, even a greater subsidization of benefits).

In the short-term, Castro also recommends re-balancing your budget to be sure you’re still spending wisely and saving towards future goals. “The 50/20/30 rule can help you estimate how much you should be saving — 50 percent on needs like food and rent, 30 percent on non-essentials and 20 percent on savings,” she says. “The most important thing is remembering to live within your means.”

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