If you don't get a 5% raise this year, you aren't necessarily taking a pay cut due to inflation. Here's why

HOUSTON, TEXAS – JUNE 09: Employees speak together at a Chipotle Mexican Grill on June 09, 2021 in Houston, Texas. Menu prices at the Chipotle Mexican Grill have risen by roughly 4% to cover the costs of raising its' minimum wage to $15 an hour for employees. The restaurant industry has been boosting wages in the hopes of attracting workers during a labor crunch. (Photo by Brandon Bell/Getty Images)Brandon Bell | Getty Images News | Getty Images

Inflation has increased as the U.S. economy recovers from the coronavirus pandemic, pushing up prices on goods such as food, gasoline and cars.

In September, consumer prices rose 0.4%, more than expected, and pushed the year-over-year gain to 5.4%, nearly hitting a 30-year high, according to the latest data from the Bureau of Labor Statistics.

The uptick in inflation has already hurt consumers, who are likely feeling the higher costs of certain items on their wallets. It also prompted a 5.9% cost-of-living increase for people on Social Security, the largest jump in 40 years.

Especially at the end of year, people may be wondering if recent inflation is eroding their pay. If they don't get a 5.4% raise in the next year, is that technically a pay cut?

While pay raises are getting back to pre-pandemic levels, they might not keep pace with inflation in the next few years – the budgeted median U.S. salary increase for 2021 is 3%, according to data from The Conference Board. The group also projected that cash for raises will be about 3% in 2022 as well.

“Companies looking at their budgets realize that [raises] are probably not going to meet inflation,” said John Dooney, a human resources manager with the Society for Human Resources Management. “But what we see is more strategies around really rewarding high performers.”

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Not a pay cut

There is some good news for workers worried about their earning power being eroded by inflation – economists generally say that getting a less than 5% raise this year isn't the same as taking a pay cut.  

“It's a lot more nuanced than that,” said AnnElizabeth Konkel, an economist at the Indeed Hiring Lab. “It depends on your basket of goods as a consumer.”

While inflation has jumped overall, the consumer price index considers an array of things, a few of which have contributed more to rising costs than others.

“For most people, prices of the things that they're having to pay for are going up, but these impacts are quite varied across the board,” said Mark Hamrick, senior economic analyst Bankrate.

The indexes for food and shelter in September contributed more than half of the monthly increase. Food rose 0.9%, with food at home jumping 1.2% from the previous month. Energy also jumped 1.3%, with the gasoline index up 1.2%.

For the year, there are also a few specific things that are driving the overall high index reading. Energy prices are up nearly 25%, and gasoline is up more than 42% from September 2020. Prices of used cars and trucks, though they declined on the month in September, are up more than 20% from a year ago.

Because of these pockets of inflation, most consumers won't see their individual costs go up 5.4% across the board. If you aren't planning to buy a car, for example, or aren't taking any trips that would be hit by higher fuel prices, you won't be hit with the highest areas of inflation.

“Not everybody flew on a plane or bought a used car,” in the last year, said Brett Ryan, senior U.S. economist at Deutsche Bank.

“The data doesn't tell the personal story of every single person,” Hamrick said.

The relationship of inflation and wages

Wages are also increasing, which is generally thought to boost inflation.

In September, the three-month moving average of wage growth rose to 4.2% from 3%, according to the Federal Reserve Bank of Atlanta's wage tracker, which uses data from the Bureau of Labor Statistics. That 1.2 percentage point jump is more than the 0.4% increase in inflation in the same month.

“Overall, income is outpacing inflation,” Ryan said. “That's a positive, or supportive of continued recovery.”

To be sure, some people will be hit harder by inflation than others.

“Inflation really does weigh on those on the lower end of the income spectrum,” said Ryan, adding that energy prices end up being one of the hardest to cope with.

“That's one area where it's harder to adjust your purchase quickly,” he said. “If you drive to work, you have to fill up the gas tank and that's problematic when gas prices are up a dollar per gallon.”

How to ask for a raise now

Even if you are being hit with higher prices due to inflation, experts wouldn't advise using that as a reason to ask for a raise at work.

“I suspect that would get into a messy argument with a hiring manager because somebody in that position could turn around and say, 'we're experiencing price increases as well,'” said Konkel, adding that people should probably leave inflation out of any wage or raise discussions.

Instead, take the time to assess and reflect on what you've achieved in your role, she said. If you've been in the position for longer than a year, have taken on more responsibility or otherwise outperformed, that's all information to bring up with your manager or take to a performance review, if you have one at the end of the year.

High performers will likely have an easier time asking for more money, according to Dooney, and businesses may be more willing to give out one-time bonuses to reward employees.

In addition, experts don't recommend that workers necessarily leave jobs if they don't get raises that offset inflation right now. Economists don't expect current volatility to be persistent and anticipate that prices will stabilize as the economy continues to recover.

“My expectation is that these things will sort themselves out,” Konkel said.

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