> Let’s assume that you are being paid $100,000 a year after taxes and you spend $50,000 of it. Well, if inflation hits 10% over the next year, your basket of goods will now cost $55,000 (i.e. $5,000 more) to purchase. How much does your $100,000 salary have to go up to offset this? 10%? Nope. It only takes 5% (i.e. $5,000) for you to break even. This is half the rate of inflation.

That's still not good enough, because even though a raise of 5% would allow one to save the same amount of money, under inflation the money saved is worth less. In fact, to preserve the same purchasing power both in the present and in the future, salaries should be raised exactly as much as inflation.