The US military has received an annual military pay raise every year with a 14.3% raise being the highest in 1983. Recently President Obama proposed that in 2014 we may only receive a 1% pay raise. Still, it is better than nothing but exactly how much of a raise is it really?
In fact, we have actually been losing money over the past few years from an economics perspective. That's right, the US military is actually receiving a pay deduction each year. This is all due to inflation. Inflation in the US can be best measured by the consumer price index reported by the bureau of labor statistics every year. On average our country has been experiencing a 3.35% annual inflation rate between 1914 and 2013.
To put this in perspective, let's assume our last year's paycheck was $1,000 and we were able to buy 1000 apples at $1 apiece. This year we will receive a pay raise of 1% increasing our paycheck to $1010. If the price of apples stays at $1 apiece then we can buy 1010 apples. This, however, is not the case. Inflation reduces the purchasing power of the dollar by an average of 3% and that means for every $100, you can only buy 97 apples. So the value of one apple has risen to $1.03 apiece.
If we look at our new paycheck with a 1% rise from last year and also calculate in inflation then we are able to buy 980 apples now with our $1010 paycheck. As you can see we can afford 20 fewer apples this year than last year even after the “pay raise”.
The 3.35% inflation rate is an average over the past 100 years but currently, the inflation rate is closer to 1.6% for 2014 which means that we can buy one apple for about $1.02 if we round up or a total of 990 apples with our $1010 paycheck. You can protect your current earning from inflation as discussed previously in Is My Money Shrinking?