Nominal vs. real
Is your raise actually a raise?
A cost-of-living adjustment (COLA) is meant to keep your pay in step with rising prices. If your raise matches inflation, your buying power holds steady. If it beats inflation, you got a real raise. If it lags, your salary technically went up while your purchasing power went down — a raise on paper, a cut in the supermarket.
Worked example: a 3% raise with 3.2% inflation
On a $60,000 salary, a 3% raise adds $1,800, taking you to $61,800. But with inflation at 3.2%, you'd need a raise of $1,920 just to break even. Your real raise is roughly −0.19% — your nominal pay rose, but your buying power slipped by about $120 a year. To genuinely get ahead, the raise has to clear the inflation rate.
How COLA is set
Federal COLAs and many private ones track the Consumer Price Index (CPI) published by the Bureau of Labor Statistics. Social Security applies an annual COLA on the same basis. When you negotiate, compare any offer to the latest CPI figure — not to last year's salary.
See the after-tax side
Remember a raise is taxed at your marginal rate. Use the salary increase calculator for the after-tax value of a raise, and the marginal tax rate calculator to see how much of it you keep.
Questions
Cost of living raise FAQ
What is a cost of living raise?
A cost-of-living raise, or COLA, is a pay increase designed to offset inflation so your purchasing power stays level. It is usually tied to the Consumer Price Index. If your raise matches inflation you break even; if it exceeds inflation you gain real income.
Is a 3% raise good if inflation is 3.2%?
No — it is a small real pay cut. A 3% raise on $60,000 adds $1,800, but you would need about $1,920 to keep pace with 3.2% inflation. Your nominal pay rises while your buying power falls by roughly $120 a year.
How do I calculate a real raise?
Subtract the inflation rate from your raise percentage. A 5% raise with 3% inflation is a real raise of about 2%; a 2% raise with 4% inflation is a real cut of about 2%. This calculator does the math and shows the dollar change in buying power.
What raise do I need to keep up with inflation?
You need a raise equal to the inflation rate. If prices rise 3.2%, you need at least a 3.2% raise to break even. Anything above that is a real gain; anything below it means your salary buys less than it did last year.
- Sources: IRS Rev. Proc. 2025-32 (2026 brackets & standard deduction) · SSA 2026 OASDI wage base ($184,500) · IRS Topic No. 751.
- 🔄 Last updated June 21, 2026 · Tax year 2026
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