How to calculate your real salary increase (inflation-adjusted)
A 5% raise feels great — until inflation eats most of it. This guide shows you how to compute your real raise, factor in city-level cost of living, and know exactly how much more purchasing power you actually gained.
The formula
The exact real-wage formula (Fisher equation) is:
Real increase = ((1 + nominal raise) / (1 + inflation)) − 1
For everyday planning, the simpler subtraction works within a fraction of a percent:
Real increase ≈ nominal raise − inflation rate
Step 1 — Pull your inputs
- • Old salary — your gross pay before the raise.
- • New salary — your gross pay after the raise.
- • Inflation rate — the most recent 12-month CPI reading from your national statistics agency.
- • Cost of living ratio — only if you're also moving cities. Compare rent, groceries, and taxes between the two cities.
Step 2 — Calculate the nominal raise
Nominal raise % = (new salary − old salary) / old salary × 100
Example: old $80,000 → new $86,000 = 7.5% nominal raise.
Step 3 — Subtract inflation
If inflation over the same period was 3.2%:
Real raise ≈ 7.5% − 3.2% = 4.3%
Your paycheck is 7.5% larger, but your purchasing power only grew by about 4.3%.
Step 4 — Layer in a city move
If you're relocating, a raise can vanish (or double) depending on the new city's cost of living. Use this formula:
Required salary = old salary × (new city COL / old city COL)
Example: you make $100,000 in Austin and get a $130,000 offer in New York. If NYC's cost of living index is roughly 1.55× Austin's, you'd need $155,000just to break even — that "raise" is actually a pay cut in real terms.
Worked example — full picture
| Old salary (Austin) | $100,000 |
| New salary (NYC) | $130,000 |
| Nominal raise | +30% |
| Inflation (12mo) | −3.2% |
| Cost of living adjustment | −55% |
| Real purchasing power change | ≈ −28% |
Even a 30% "raise" can leave you dramatically worse off after inflation and a high-cost move. Always run the numbers before saying yes.
Skip the math — model it in seconds
FuturePath uses live city-level cost of living data to translate any raise or move into real purchasing power, taxes, and lifetime savings impact.
FAQ
What inflation rate should I use?
Use the most recent headline CPI from your national statistics agency (BLS for the US, StatCan for Canada). It's the closest match to everyday household purchases.
Should I use pre-tax or post-tax salary?
For a like-for-like comparison, use gross (pre-tax) salary and then adjust for the effective tax rate of each city or country separately.
Does this work for hourly wages?
Yes — the formulas apply identically to hourly rates. Just make sure the annualized hours are the same on both sides.