It means you already had the paycut, you need to have at least %4.2 rise + reimbursement to make even.
In high inflation countries you often get a revision every 2-3 months and you get a rise that is higher than the official inflation, as a result this solidifies the inflation and boosts the economy as everyone immediately buys whatever they can before it becomes more expensive. It's a vicious cycle.
Reminds me of stories from ex-Yu during high inflation periods (e.g. yearly doubling; not counting periods when there were runaway spikes of almost daily doubling) when people would go to remote areas where shops didn't yet get the updated prices from headquarters and basically walked away with a bunch of near free stuff.
Not necessarily, depends on the distribution of your own expenses. If you deviate from the average urban household (lets say, you have a particularly long commute or your car isn't as fuel efficient as the average. Look at the increase on fuel prices, 40.5%!).
If you're at $5,000/month, a 4.2% raise puts you at $5,210. If you're spending $600/month on gas (not unreasonable for someone that drives an SUV and lives in the suburbs instead of in the urban core), you still come out behind.
>> If you're at $5,000/month, a 4.2% raise puts you at $5,210. If you're spending $600/month on gas (not unreasonable for someone that drives an SUV and lives in the suburbs instead of in the urban core), you still come out behind.
This is the problem with people treat CPI as some word from the heavens...it is not. CPI is a highly constructed figure which conveniently includes/excludes things and is really more a floor of what the inflation is. Anyone living in the real world knows experienced inflation is way higher.
> CPI is a highly constructed figure which conveniently includes/excludes things and is really more a floor
It’s an attempt at a central tendency in a complex economy with non-linear variability.
> Anyone living in the real world knows experienced inflation is way higher
Here is a map of wage changes across the U.S., 2024 to 2025 [1]. Lots of variance! If you’re on the West Coast, right now, you’re seeing above-CPI inflation. If you’re in the Northern Rockies, where I am, you’re seeing less.
Typically, you need a little more to make up for the difference in how much more taxes you pay at the marginal end vs the average for your total income...
The median earner with a standard deduction would need a ~4.7% raise to stay even...
"Inflation" is also increasingly distributed unevenly. The top 10% continues to make up a larger and larger portion of spending. It is entirely possible for ~4.2% inflation to be substantially higher (or lower) for the median household than the overall reported number.
Most of the relevant numbers in the American tax code are inflation adjusted, but not all of them. The biggest ones for people on this website are probably the value of the Child Tax Credit and the thresholds at which the Net Investment Income Tax/Additional Medicare Tax kick in.
I think the point is the tax brackets are supposed to be inflation-adjusted. So all the brackets go up 4.2% too. Idk if the implementation details make this actually work out 1:1 but that’s the idea.
Much more since the numbers are cooked anyways. Car model N cost 10k, and car model N+1 costs 15k, if N+1 has 2 more airbags, one more gear, a keyless starter it will be counted way under 50% inflation, even though you pay 50% more.
Most of the average joe's money is spent on housing + food + energy these things are all way above the calculated """average""" inflation
They're not necessarily "cooked," (but they certainly can be). Inflation is genuinely hard to calculate since it's different for everyone, goods and services purchased drift over time, and as you mentioned, that exact good also changes over time. CPI (and others) are more useful in a MoM or YoY context. At 10 years, it's better viewed as best guess cost of typical living rather than an economic indicator comparing apples and oranges.
> housing
This is actually the hardest to get right because it's the largest, and 2/3 of Americans own homes, so part of their costs are fixed.
No it's cooked. For high tech items, they assume that improved technology means you are getting more for your money even if the price goes up, so they discount it. It's true that you get more for your money, but it ignores threshold effects, like you just can't buy an equivalent phone for $10 even if todays phone's are 200x better.
Then there's the "owner's equivalent rent" BS and this is 25% of CPI. It answers the question "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities?" It assumes rental price and housing costs are somehow linked when in reality asset prices have far outstripped rent.
> it assumes rental price and housing costs are somehow linked when in reality asset prices have far outstripped rent
It's pricing the cost of shelter. Renting a home is buying shelther. Buying a home is buying shelter and buying a financial asset. OER is the way you separate the last two components. Otherwise, you'd have to only look at rents to determine housing prices, which would be rubbish in a country where most households live in homes they own.
Suppose you want shelter. It used to be that you could buy a house for a reasonable price and move in. But now that's unaffordable, so instead your have to pay rent. In CPI thinking these are equivalent forms of shelter, but I bet if you asked most Americans, they would not agree with you.
Which flows through to owner-equivalent rent, in part.
> In CPI thinking these are equivalent forms of shelter, but I bet if you asked most Americans, they would not agree with you
It really doesn't. When measuring rent, you directly measure rent. For OER, you're measuring the housing price and imputing shelter cost from that. They're similar, but different. Sort of like how renting and owning are similar, but different.
Also, given the variance in housing affordability across the country, you'd almost certainly have to strip out any financial-asset component anyway to meaningfully compare the resulting number.
why should the asset prices matter in OER? the aim is understanding cost. BLS no longer questions homeowners but samples local rents to estimate OER since homeowners could've been wrong in their guess. of course, someone may have locked in a low interest rate so their expense is overstated. counterargument is that you are consuming a more valuable service by occupying the unit even though market rent exceeds your costs so it doesn't matter if your cost is assumed to be the market rent. note there is a 6-month sampling lag of rents, which doesn't help the perception gap in the inflation figures.
A conversation with your boss about a COLA raise really shouldn't include your own personal finances. "I just bought a house" is not a good reason for a raise; "prices in our area have increased" is a much better one
True, but how inflation affects each person is different. This isn't a good measure, but it is the best we have, and usually close enough to the truth.
This never made sense to me. Doesn't this assume you are spending ALL your income though?
If I make 100K and get a 3% increase, that's $3000 more.
But if I only spend 30K to live, and my living expenses go up 5%, that's only a $1500 increase to my living expenses while I earned $3000 more that year. So how is that a pay cut if I actually have even more money left over that basically just goes into my investment account then.
The dollars going into your account are worth less than before. The ultimate destiny of all money is to be spent on goods/services eventually, and the amount of goods/services your salary can purchase is net (5-3)% less than the year before. Invested, spent, willed, donated, it doesn't matter, the money is already worth 2% less when it enters your hands. (Worth noting that CoL increase is not exactly equal to inflation, you could experience a local CoL increase without inflation if say your town becomes a popular destination which raises rents)
It's about the worth of what I am receiving from my employer and nothing to do with spending it.
If John makes $100k and lives on $10k, then cost of living increases by 100%. I believe John should be paid $200k, and according to you his salary should go to $110k.
> Doesn't this assume you are spending ALL your income though?
Why wouldn't you be? You will die, and the vast majority of religions (including atheism) don't let you take it with you. Sure there is some saving for a rainy day or retirement. However why are you earning more than that? If you need a job for social reasons only there are plenty of volunteer jobs that can provide that.
I save for retirement yes. I only spend about 30% of my income to live and other other 70% I save for retirement.
I don't feel like I'm being cheap or limiting myself. I have hobbies that I enjoy, computers, home theater, pickleball, scuba diving, hiking, biking. I travel a lot for fun, backpacking and trips around the world to see cool cities, hike mountains and experience different cultures.
I don't find my job particularly demanding or stressful, it's flexible, the people I work with are nice. I just spend what I feel I need to spend to do what I want to enjoy myself and the rest I put in investments.
I know I can't take it with me, but it just means I will be able to retire that much sooner.
I get a 3% raise every year as the default, aside from promotions and such, and the amount it gains me is about 3x higher than my cost of living increases have been these past years, so it really does not feel like I am making less. I am living my same life that I enjoy and saving a bit more and more each year.
But a huge percentage of Americans are spending all, or approximately all, of their income. (I don't know offhand if it's technically a majority, but if not, then it's not far under 50%.)
And these are the people who are going to be most affected by inflation and other price shocks.
You are exactly right. You are most likely not getting a pay cut just because your raise doesn't match inflation. It totally depends on how much of your money you are spending and what you are spending it on.
The solution is Treasury Inflation Protected Securities (TIPS). You do have to pay taxes on the inflation adjustment (OID income). As long as the interest (after taxes) is higher than taxes on inflation adjustment you're good.
In most cases, you are granted a notional dollar amount that is immediately turned into a concrete and fixed number of shares that then vest over the next 4 years.
Then, any share price appreciation on the shares is captured by you at vesting, rather than being paid in cash (the value of which has been inflated away) and then purchasing shares/index that has risen in the last 1-4 years.
If you are paid in cash, you will be buying fewer shares per dollar (and per year) rather than getting the same number.
Right, but cash compensation could be structured the same way, minus whatever would be settled on for the retention value to the employer of the vesting schedule.
I get your point. The value of stock isn’t that it’s stock per se, but rather that it’s inflation-resistant even when illiquid.
It's optionality that only has an upside financially, while the downside is just having to do more interviews.
Let's say you're worth 300k on the open market as a senior software engineer. If you get a job that pays 200k a year + 400k in stock over four years, you're making ~300k.
Except if after the first year, the stock goes up 30%, you're making 330k the second year + whatever cash raise you get. Then if it goes up another 10%, and so on... etc.
If, however the stock falls after the first year, presumably you can go out and find another 300k a year job at a different company.
I've known a few people who lost everything when the company went bankrupt. (most died of old age when I was a kid - before pension reform companies often did put your retirement in the company stocks)
We are bottlenecked at energy supply, not running hot via demand. Raising rates is likely to stifle already weak sections of the economy. Additionally, we are getting into territory where raising rates threatens our own ability to pay our debt.
Just to be clear, I am not coming at this from some anti-interventionist or anti-monetary tool standpoint. It's just that demand side tools seem like the wrong lever for the job. We are backing slowly into the corner of persistent inflation or structural failure of some kind.
How is it inaccurate? If I only care about buying apples, and apples get 10% more expensive, and my salary only increases by 5%, then I can't buy as many apples as I could have before. How many apples I do actually buy in the end is irrelevant to the calculation.
The person you're replying to erroneously interpreted "stay even" as "avoid going into debt," instead of your income's purchasing power remaining constant.
Consumer price index is about consumer goods. This is why tarrifs and such are considered regressive - they hit people harder the less money they have because a larger percentage of their spending is consumer goods.
If I invest half my income and spend half my income, and the prices of goods goes up 4.2% and my income goes up 4.2%, then I've made progress; I'm now investing more than half my income, because the half of my income I was spending has stayed even and the half I was investing has increased.
> If I invest half my income and spend half my income, and the prices of goods goes up 4.2% and my income goes up 4.2%, then I've made progress; I'm now investing more than half my income, because the half of my income I was spending has stayed even and the half I was investing has increased.
Let's say your income is $100. You spend $50 and invest $50. The prices of goods goes up 4.2%, so to keep your current living standards, you must now spend $51.20. Your income increases by 4.2% to $104.20. After expenditures, you now have $51.20, or exactly half your income, to invest. So you haven't made any progress. And investing $50 now is equivalent to investing $47.98 before in terms of what you could have bought instead of investing.
