Question

If your employer gives you a raise that is less than the inflation rate, it means that

Answer 1

your real wage (salary) will decrease

Step-by-step explanation:

the change in a person's real wage = nominal wage - inflation rate

In order for your real wage to at least remain the same and not decrease with inflation, it must increase in the same proportion. The formula used to calculate real wage = nominal wage / (1 + change in the CPI)

Many labor contracts, specially unionized labor agreements, use cot-of-living clauses which adjust wages to CPI increases. It doesn't apply when the CPI decreases though.

Answer 2

The employee is losing purchasing power.

Step-by-step explanation:

Inflation can be defined as a sustained increase in the general price level of goods and services in an economy over a particular period of time.

The inflation rate has a direct bearing on your income because if your history of salary increases at your company is less than the inflation rate, year after year you are losing purchasing power.