Pay Raises Have Slowed Way Down -- and Are Not Keeping Up With Inflation

Many Americans are earning less in real terms, with no change in sight.

Last year, it felt like prices went up so quickly, every trip to the grocery store was noticeably more expensive than the last. The cost of other essentials, such as gas, housing, utilities, and insurance premiums went the same way. The good news is that inflation does seem to be slowing. But we're still stuck with higher costs as, so far at least, prices aren't coming back down.

On the flip side, most people's paychecks have not kept up with inflation. So in real terms, many Americans have less available cash, and it doesn't look like that will change much in 2023. A recent Payscale report on salaries showed that many companies aren't allocating extra money to pay increases this year. Indeed, some are actually cutting their budgets for pay raises because they're worried about a recession.

Pay raises aren't keeping up with inflation

If we look at the figures in the Payscale report against last year's inflation data, it paints a depressing picture. According to the Bureau of Labor Statistics, prices rose 6.5% from December 2021 to 2022. Food prices rose by 10.4% across the year, while the cost of car insurance increased by 14.2%.

In contrast, some organizations did not increase their base salaries at all in 2022. Of those that did, 65% made base pay increases of less than 4%. Only 18% gave base pay raises of over 5%, which would have been close to matching inflation. The survey shows that many companies plan to implement similar or lower base pay increases in 2023.

Now, base pay is not the only type of salary increase out there. Some companies also paid bonuses and stipends to help their staff handle inflation. Almost 40% said they were offering bonuses, while around a third said they'd used stipends and allowances to offset the higher cost of living.

Dealing with higher living costs

If your pay does not rise in line with inflation, your money won't go as far. As a result, those Americans who got a base pay raise of less than 4% -- and those who got no pay raise at all -- will have had less cash to spend each month.

If you are in this boat, it isn't easy. Some people had to dip into their savings accounts to cover essential costs last year, and others took on debt. It's understandable, but those are not long-term sustainable solutions. Carrying debt can prove costly and the interest payments eat into your available budget.

Try to find ways to balance your budget, either by increasing your earnings or decreasing your spending.

Look for ways to cut costs

It may feel as if you've already cut your budget to the bone. But if you're living paycheck to paycheck or spending more than you earn, go back through your costs and see if you can shave off a few more dollars. If you can increase the gap between what you earn and what you spend, you'll have more money in your bank account to build financial security.

See if you can cut your grocery expenses by shopping at a lower cost store or knock down your utility or gas bills by changing your habits. If you regularly spend a lot more than you earn, you might consider more drastic moves such as moving to a cheaper home or selling items you're not using.

Look for ways to increase your earnings

Cost-cutting isn't always the answer. Another way to live within your means is to bring in some extra cash. Here are some moves to consider:

• Ask for a pay raise: The Payscale report shows that some companies are still giving raises, particularly for high-performing employees with the right skill sets. Research what other people in similar positions earn, and try to approach your boss with a list of your accomplishments.
• Consider switching jobs: The jobs market is still relatively strong, and it is often easier to negotiate a higher salary when you're moving to a new position. That said, there are pros and cons to consider. If we do enter a recession, newer hires may be more at risk than old hands.
• Take on a side hustle: From online tutoring to graphic design, the gig economy is alive and well. Be aware that there are only so many hours in the day, so try not to overstretch yourself -- it's important not to neglect your main work in favor of your side gig.
• Rent out space: If you have a spare room or parking space you might be able to make them work for you. If you do this or make money through a side hustle, make sure you understand the tax ramifications.

Bottom line

If your pay hasn't increased at the same pace as inflation, you're not alone. But it does mean your spending power will be reduced and you'll have less cash in real terms. What's important is to find a way to live within your means so you're not taking on debt or using your emergency savings to cover everyday expenses.