Should Wages Go Up with Inflation?

Your living expenses are going up, but your income is not. Does your employer owe you a cost-of-living raise?


What are your thoughts on inflation? Should wages go up with inflation? Are companies obligated to give cost-of-living raises?

— Jennifer, Kentucky


Good question, Jennifer. Inflation should be on the mind of anyone who is carefully about money. It should also be on the mind of anyone who determines employee pay.

Inflation is an unfortunate and unavoidable part of modern financial life that gradually makes our money less valuable over time. And over the past year or so, you’ve likely noticed inflation reaching painful levels. You feel it when your utility bills go up, when gasoline gets more expensive, when rents increase and when you see higher prices at grocery stores or restaurant menus.

It’s easy to get wrapped up in economic theory when talking about inflation, and we won’t go down that road. There are some basic principles that guide us, though. In slow economic times, inflation tends to be low, hovering around or below 1% a year. When the economy is really humming, inflation reaches a higher rate. But government organizations and banks like  the Federal Reserve do their best to make sure that inflation rates don’t become so high that they negatively impacts the economy. They don’t always do a perfect job.

As an individual worker, inflation can put you in a tough spot. It drives up the prices of the goods, services and commodities that you count on the most. And unless you get raises to match the cost of living, there’s nothing you can do about it.

And while those prices can increase suddenly at any time of year, your income probably does not. If you work for a set wage or salary, you may only get an opportunity for a raise once a year or so. Some companies don’t even give raises that often. So while prices are going up, your income may not be. That begs the question — should wages go up with inflation?

Cost-of-Living Raises

Many companies realize  inflation is putting pressure on their employees’ budgets and try to compensate for this by offering periodic “cost-of-living” raises. These raises aren’t based on performance or advancement; they’re simply attempts to account for inflation and keep your real income consistent. Some companies will match these raises to the exact rate of inflation, while others may just ballpark it.

It’s obviously great when companies give cost of living raises to employees. And it seems that most managers, bosses and business leaders should want to do this. But life isn’t always that easy. Sometimes companies are in such a financial squeeze that they can’t afford to give even small raises. Other times you have managers that don’t understand the value of keeping good employees happy.

In the recession of the last decade, inflation was been pretty low, but many companies saw drastic drops to revenue and profit. Some owners struggled to simply keep the doors open. In very tight financial times, something as small as a cost of living raise can make the difference between solvency and insolvency. If your company has been battling just to stay afloat, I wouldn’t blame your boss for not matching inflation for a year or two. And if you’re concerned about the situation, have a conversation with your managers. Ask if they will commit to raising salaries once revenues return to normal.

Business is Booming — Should Wages Go Up with Inflation?

What if this isn’t your company’s situation though — what if business is booming and profits are growing? In that case, yes, your employer should be increasing your wage to match inflation.

You could make a good argument that a profitable company has an ethical obligation to do this. it also makes a lot of sense from a business and management standpoint. If employees know  their company is succeeding but don’t see that reflected in their paychecks, they’re eventually going to become frustrated, disgruntled or bitter. If this goes on long enough, it will affect their work, which will in turn begin to drag down the company’s performance. The manager of a successful company should see pay raises as an essential part of maintaining employee morale and ensuring future success.

Companies that succeed do so in large part because they have great employees, and wise managers make sure to reward those employees. This means promoting people who show promise, offering raises for increased training or skills and even giving raises to people based on the experience and expertise that they’ve gained while working for the company. Good managers are always looking for opportunities to increase employee compensation, not looking for opportunities to tamp it down.

If you’re in a situation where your income is not keeping up with inflation, it could be time to work on growing that income. You can ask for a raise, pursue a promotion, take on new responsibilities or get additional training. If none of those opportunities are available to you, it could be time to look for a new job… somewhere you can thrive and advance.

So, should wages go up with inflation? Ideally, yes. If yours aren’t, perhaps it’s time to think about a career change.

Taking the Stress out of Inflation

If inflation is putting pressure on your finances, there’s a good chance it’s causing you a lot of stress. But it doesn’t have to. For years, I’ve been helping people eliminate their financial stress, and I would be honored to do the same for you.

My free video series “Stress Free Finance” will give you quick, simple daily steps to help you stop worrying about money and build a better future. Here’s a preview. To join, simply fill out the form right below the video.

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