Real vs Nominal Wages

A 5 percent raise with 3 percent inflation is a 2 percent real raise; adjusting money by price levels is the difference between feeling richer and being richer.

Overview

Nominal pay is the check's number; real pay divides it by a price index such as the CPI. The distinction decides decade-scale questions: 1970s stagflation delivered healthy nominal gains that lost ground after inflation, and the 2021 to 2023 inflation surge briefly erased years of nominal raises for many workers before tight labor markets rebuilt them. Long-run comparisons, 1965 versus today, are extremely sensitive to deflator choices. Rule of thumb: always ask which year's dollars a wage number is quoted in.