Explainer

Real vs nominal pay

The number on the check

Nominal pay is what you're paid in dollars. Example: if you made $25 an hour last year and $25.75 now, your nominal pay rose 3%.

Real pay asks what those dollars buy. Take the price change over the same year out of the raise, and what's left is the change in your buying power.

A raise that loses ground

Example numbers, not real data: say your pay rose 3% this year but prices rose 4%. Your check is bigger, but it buys less than it did a year ago. Your nominal pay went up and your real pay went down.

Weekly pay can tell a slightly different story from hourly pay, because it also counts hours worked. A longer workweek can make up some of what inflation takes from an hourly rate.

A quick way to estimate it

For small numbers, real pay growth is close to pay growth minus inflation. In the example, 3% − 4% ≈ −1%. That's a shortcut, and the Bureau of Labor Statistics does the exact math in its Real Earnings report.

Worked example (illustration only): say you earned $1,000 a week a year ago and got a 3% raise, to $1,030. With prices up 4%, $1,030 now buys about what $990 bought a year ago ($1,030 ÷ 1.04). You're about $10 a week behind, even after the raise.

Why it matters

If your raise was smaller than inflation for the year, your real pay fell. Inflation also hits households unevenly. If you drive a lot, a jump in gas prices weighs more on you than the average suggests. See headline vs core inflation and the gas-cost calculator.

Get the real numbers

This page explains the idea. For the latest figures each week, get Three Numbers, our free Sunday newsletter.

Future Macro is education, not financial advice.