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More dollars. More buying power?
The difference between the amount you earn and what it can buy.
An increase in your income tells you one thing. How that increase compares with prices tells you another.
Two ways to look at income.
Nominal income is the amount expressed in dollars. Real income adjusts that amount for changing prices, giving you a way to compare purchasing power across time.
A price index such as the Consumer Price Index (CPI) helps make that adjustment. The Bureau of Labor Statistics explains the distinction and how the calculation works.
A simple example.
Imagine income rises 5% and the relevant price index rises 3% over the same period. Divide 1.05 by 1.03, then subtract 1. The result is an increase in purchasing power of about 1.94%.
These numbers are hypothetical. Try changing them below to see how the relationship works.
What changes after inflation?
Percentages are converted to decimals before calculating. Both inputs cover the same period.
Your experience can be different.
CPI represents average price changes for a defined consumer basket. Your own mix of housing, food, transport, and other spending can differ from that average. The BLS CPI FAQ explains this limitation.
When a report says income increased, ask: in dollars, or after adjusting for inflation?
Start with the sources
Examples are illustrative calculations, not current inflation or wage data.