If annual salary increase percentages are less than inflation doesn't that mean that each year is financially tougher than the last?
Inflation is a macro pressure. It is not experienced at a micro level on a 1 to 1 basis.
In a given year a pay raise less than the stated CPI rate, for some people the change will either
- be a real pay decrease, or
- make no difference, or
- be a real pay increase
Over a long time if that trend continues, spread over a large number of people, on average, it will be a real pay decrease.
Short answer: YES
A 20% annual inflation rate means current goods and services will be more expensive by 20% next year. If your incremental salary annual raise is less than 20%, let say, 10%, then you are beaten (20% - 10% = 10%) by inflation. This means current goods and service will be more expensive for you by 10% next year.
Here is the illustration :
- Suppose you would buy a car next year, current price is $1.000
- You have $1.000 salary, and you are able to buy a car right now
- Let set Inflation rate 20% and your salary increase 10% every year
- Jump to next year, the car now priced at $1.200 and your salary is $1.100
- Now you can't buy a car, so you are financially tougher