A pay rise is quoted in money: you earn 4 percent more than last year. What matters is what that money buys. Economists call the first figure nominal pay and the second real pay.
The conversion is simple in principle. If your pay rises 4 percent and prices rise 3 percent, your buying power rises by about 1 percent. If prices rise 5 percent, you are about 1 percent worse off despite the raise.
Why it can feel different
Taxes can take a larger share of a bigger pay cheque if thresholds do not move with prices. Rent, energy and food, which take a large part of many budgets, may rise faster than the average. And people remember what things used to cost more clearly than they remember what they used to earn.
Over a career, the biggest changes in pay often come from changing jobs or moving up rather than from annual raises, which are frequently closer to the rate of inflation than to a step up in real pay.
A quick way to check
Take your raise as a percentage and subtract the inflation rate for the same period. The difference is a rough guide to the change in your buying power. For a closer answer, look at the prices that matter most to you: rent, travel and food.
Key takeaways
- Nominal pay is the number on your payslip; real pay is what it buys.
- Raise minus inflation is a rough guide to whether you came out ahead.
- Your own costs, not the average, decide how it feels.