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Understand inflation. Look up inflation. Subtract the inflation rate from your increase percentage. Relate the effect of inflation to purchasing power.
Inflation is an increase in the prices of goods and services, so it has an effect on your cost of living. High inflation, for instance, often means an increase in food, utility, and gas prices. People tend to buy less during periods of high inflation because these periods mean higher prices. A wide range of factors determine the inflation of currency. In the U.S., the Department of Labor's Bureau of Labor Statistics releases a monthly report following and calculating inflation. You can find a month-by-month breakdown of U.S. inflation rates for the past fifteen years here. To determine the effect inflation has on your increased salary, simply subtract the rate of inflation from the increase percentage you calculated in Part 1. For example, the average inflation rate in 2014 was 1.6%. Using the 11.1% increase rate calculated in Part 1, you would determine the effect of inflation on the raise like so: 11.1% - 1.6% = 9.5%. This means that once you take into account the inflated prices of standard goods and services, the increase is only worth an extra 9.5% because the money is worth 1.6% less than the previous year. In other words, it took on average 1.6% more money in 2014 to buy the same items as in 2013. Purchasing power refers to the comparative costs of goods and services over time. For instance, say you have the salary of $50,000 per year from Part 1. Now say that inflation stays at a flat 0% the year you get the raise, but rises 1.6% the following year without you receiving another raise. This means it will take you an additional 1.6% to purchase the same basic goods and services. 1.6% of $50,000 is equal to 0.016 x 50,000 = $800. Your overall purchasing power based on inflation actually decreased by $800 over the previous year. The Bureau of Labor Statistics has an easy-to-use calculator for comparing purchasing power between years. You can find it at: http://www.bls.gov/data/inflation_calculator.htm