12 Ways Inflation Is Quietly Influencing Your Paycheck

Inflation doesn’t have to be sky-high to impact your career and salary, especially if you're trying to get ahead financially. 

Data from the U.S. Bureau of Labor Statistics (BLS) puts inflation at 3.24% for October. That’s down from September’s 3.7% and less than half of the 7.75% that was seen in 2022.

It’s important to understand how inflation influences the labor market — both for your career trajectory and financial stability. Here are 12 surprising ways inflation is affecting your job and your salary.

In case you don’t know what the Consumer Price Index is, the BLS describes it as “the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” Basically, how much stuff costs you at the store.

The problem is that it’s gone up over the last year. Specifically, it went up 3.2% across the board. That means you'll need to learn some smart shopping hacks these days.

Ideally, salary and wage increases keep pace with inflation. According to the BLS, wages and salaries rose 4.6% over the last year. That means it outpaced the 3.2% inflation rate we see now.

But that doesn’t always happen. When inflation outruns salary increases, it can effectively cancel any pay raise. High inflation rates can further lead to unpredictable shifts in purchasing power and financial instability.

The economic pressures of inflation can lead to increased financial stress for employees, severely impacting their overall well-being. In fact, employees already don’t feel so great about their financial situation.

According to a recent Bank of America report, only 42% of the workforce rates their financial wellness as either “good” or “excellent.” That’s the lowest it’s been since 2010.

When the rising cost of essential items outpaces wage growth, it can create challenges affecting mental well-being, self-esteem, productivity, and the risk of burnout.

Fortunately, employers have several meaningful options to address these issues, including one-time bonuses, financial wellness programs, competitive voluntary benefit packages, and employee discount programs.

Since inflation has a direct impact on how far your paycheck goes, it follows that consumer spending behavior may change in response to that. And those changes in consumer spending patterns can influence demand for certain jobs and industries.

That can mean people switch to off-brands, eschewing the more expensive options. They may also abandon bigger grocery chains in favor of big-box stores, which can impact employment opportunities at those stores.

Inflation impacts different industries in different ways. Some can face higher costs, potentially leading to job cuts or other changes.

For example, essential goods — the stuff we need every day to survive — aren’t hit as hard as non-essential items like luxury goods. The same goes for industries with fewer competitors since consumers don’t have as many options to switch.

Inflation doesn’t only impact the cost of goods at the grocery store; it affects everything. The BLS reported that, while inflation is low now, the costs of everything from rent to recreation and personal and medical care have increased.

One way to combat inflation is through cost-of-living adjustments or COLAs. Social Security is one kind of benefit program that can change its payments to keep up with inflation.

Inflation and salary increases tend to move together, but they stem from distinct factors, which means the impacts are related but not the same.

In years with high inflation — it hit 11.35% in 1979 and 8% in 2022 — salary increases may lag, which puts the workforce at an economic disadvantage. 

Conversely, in low-inflation periods like 2001 (2.8%) or 2020 (1.2%), employees can enjoy more favorable real spending power despite lower salary increases.

Pay increases are considered "sticky" in labor economics. That means employers have difficulty reducing them during market downturns and are slow to rise on the other side.

During the spike in pandemic unemployment, employers refrained from cutting individual salaries. 

In 2021 and early 2022, tight labor markets prompted salary hikes for high-demand roles while overall pay levels were kept stable. Now that inflation is easing, that caution has paid off.

Inflation can pose challenges for retirees because, perhaps obviously, it affects the value of their retirement savings. Inflation can be tough on people living on a fixed income.

That’s one of the big reasons the Social Security Administration boosted benefits by 8.7% for 2023. Another cost-of-living adjustment is coming for 2024, this time an additional 3.2%.

Being prepared for inflation’s spikes and dips is critical when it comes to retirement planning. The financial experts at Merrill have a few suggestions.

One is to delay claiming your Social Security benefits until you’re 70, which could boost your monthly benefits by 77%. Another is to focus your investments on growth opportunities while keeping an eye on opportunities to rebalance.

Another key piece of advice is to plan for how much health care will cost in the future, which could top $315,000.

One nightmare scenario when it comes to inflation and the job market is if inflation causes a recession. According to Fidelity, there are three ways that can happen:

• If rising inflation causes people to cut way back on spending, that can lead to less revenue for businesses
• If the Federal Reserve raises interest rates excessively to control inflation
• If wage growth doesn't match inflation

The American economy is a vast, interconnected web. Inflation — that gradual increase in consumer prices — has significant impacts.

If a full-time job doesn’t bring in enough money, people may have to consider make extra money. That can lead to a negative feeling about the economy overall.

The more you know about how inflation works, the more you will be empowered to make informed decisions about your career and salary.