Receiving a higher salary does not necessarily mean becoming richer. If income rises by 3% but the prices of the goods and services we buy rise by 5%, the number on the payslip is higher, but that income buys less. This is the difference between nominal and real values, and it is one of the most important concepts for correctly interpreting wages, savings and returns. Inflation does not physically reduce the number of euros we own: it reduces what those euros can buy. Nominal salaries can therefore rise while purchasing power falls. ISTAT data clearly illustrate how persistent this phenomenon can be: in its 2026 Annual Report, the Institute notes that, despite the recovery in collectively agreed wages in real terms in 2024 and 2025, purchasing power at the end of 2025 was still below its 2019 level.
Nominal and real: the distinction that changes the interpretation
Suppose a net monthly salary rises from 1,800 to 1,854 euros. The increase is 3%. If the general price level rises by 4% over the same period, the nominal salary has grown but the real salary has fallen. A useful approximation of the real change is obtained by subtracting inflation from nominal growth: a +3% salary increase and +4% price increase mean approximately −1% in real terms. More precise calculations use a multiplicative relationship, but for small changes the difference conveys the idea well. If 100 euros previously bought a basket of goods and a year later that same basket costs 104 euros, having 103 euros is not enough to maintain the same purchasing power.
A complete example
Imagine someone earning 2,000 euros net per month in 2025 and spending an average of 1,600 euros, saving 400. In 2026 their salary rises by 4% to 2,080 euros. If the cost of their personal basket increases by 3%, maintaining the same lifestyle requires approximately 1,648 euros. Their theoretical capacity to save becomes 432 euros: income has increased both nominally and, in this example, in real terms. But if actual expenditure rises to 1,850 euros because they add new consumption, savings fall to 230 euros. The problem is no longer inflation but growing discretionary spending. Separating the two effects helps identify where to act.
Why “personal” inflation may differ from official inflation
Inflation measured by ISTAT is based on a representative basket of household consumption. But nobody buys precisely the average basket. Someone spending a very large share of income on rent, energy and food may experience a very different rise in living costs from someone who owns their home and devotes a substantial portion of income to other goods. Suppose general inflation is 2%, but someone's rent rises by 6% and represents 40% of their budget. Their actual purchasing power may deteriorate more than the average index suggests. This does not make the official figure “wrong”: it means a national average does not match every individual household's experience.
Building a personal index without pretending to be precise
To understand your own case better, you can group expenditure into categories: housing, food, transport, health, education and discretionary consumption. If a household devotes 45% of its budget to housing, increases in rent, energy and building service charges will carry much greater weight than for someone living in a mortgage-free home they own. This does not produce an official index, but a useful management measure for the household budget. I would then compare income growth with the change in expenditure needed to maintain the same standard of living, avoiding treating new consumption as inflation. If comparable spending rises from 1,600 to 1,680 euros, the increase is 5%. A salary rising from 2,000 to 2,080 grows by 4%: the surplus goes from 400 to 400 euros, remaining nominally identical but buying less at the new prices. This approach separates price effects from consumption choices.
Wage increases and the recovery of purchasing power
When prices rise very quickly and wages adjust with a delay, a real loss develops that is not automatically recovered as soon as salaries start growing faster than inflation again. It takes time. Imagine an income of 100. If prices rise by 10% in one year while income stays unchanged, purchasing power falls. The next year, prices rise by only 2% and the salary grows by 4%. In that year the worker recovers approximately 2 percentage points in real terms, but has not erased the previous 10% loss: they are merely beginning to recover it. This is why looking at a single year's figure can be misleading. The cumulative development of prices and wages must be considered.
Why recovery takes more than people think
Percentage changes do not always cancel out by adding and subtracting the same numbers. If prices rise by 10%, a 100-euro basket becomes 110. To restore initial purchasing power, income that remained at 100 must rise by 10%; but if income had first fallen by 10% to 90, an increase of 11.1% would be needed to return to 100. The calculation base changes. This explains why, after a period of high inflation, subsequent wage increases may improve the situation without immediately recovering all the ground lost. The timing of the adjustment also matters. If prices rise in January and salary is adjusted in December, the household bears the higher costs on its old income for almost the entire year. A nominal increase equal to average annual inflation may therefore not fully offset the loss suffered during the year, particularly when inflation is rapid and adjustments are delayed.
Inflation also affects cash
The reasoning applies not only to salaries but also to idle money. If I hold 20,000 euros for five years in an account earning no return and prices rise cumulatively by 15% during that time, I will still see 20,000 euros in the balance, but will be able to buy fewer goods and services than initially. This does not mean all cash should be invested: part of it has the specific function of ensuring availability and security. It does mean cash has an often invisible economic cost, represented by lost purchasing power when its net return is below inflation.
Investments must also be assessed in real terms
If an investment returns 5% in a year with inflation of 3%, the real gain is not 5%. Before tax and using an approximation, it is about 2%. If the return is instead 2% and inflation 4%, nominal capital grows but purchasing power falls. When assessing long-term results, I therefore always try to distinguish nominal and real returns. The former tells me how many more euros I own; the latter seeks to measure how much the purchasing capacity of that wealth has increased.
A salary increase can also change the spending structure
There is also a less mathematical but very tangible phenomenon. When income rises, spending often rises too: better housing, a more expensive car, subscriptions, travel, restaurants and financing commitments. This is commonly known as lifestyle inflation. In this case, purchasing power may genuinely have increased, but the savings surplus does not improve because spending quickly adjusts to the new income. I would therefore always distinguish three questions: has nominal income increased? Has real income increased? Has the capacity to save increased? They may have three different answers.
What I would look at in practice
To understand whether my financial situation is really improving, I would not simply compare my salary with a year ago. I would consider price changes, but above all compare my budget: how much did I spend on housing, food, transport, utilities and discretionary items? What percentage of income do I save today? How much has my net worth changed? Inflation is a macroeconomic phenomenon, but its effect is personal. The national indicator is therefore essential for understanding the context, while the individual budget helps reveal what is actually happening to us. The statement “I earn more than last year” is only the beginning. To know whether we are genuinely better off, we must ask how much of the increase has been absorbed by prices and how much has become greater capacity to consume, save or invest.
Note. This article is for information and educational purposes only. The examples are simplified and do not constitute financial or pension advice.