What is 'bracket creep'?

Bracket creep refers to the phenomenon where inflation causes individuals' income to rise, which can push them into higher income tax brackets. This occurs even though their real purchasing power or standard of living has not actually improved, as the nominal income increase may only be a result of inflation rather than an increase in real income.

As income levels rise due to inflation, without any adjustment in tax brackets for inflation, taxpayers find themselves paying a higher percentage of their income in taxes. This can lead to an increased tax burden, as wages might grow in response to rising costs of living, but not in real terms.

In contrast, other options mention various scenarios that do not accurately describe bracket creep. For instance, changes in investment brackets due to market conditions or sudden increases in tax rates do not capture the essence of bracket creep, which specifically relates to the impact of inflation on individual taxpayers. The gradual increase of expenses over time refers to everyday financial situations but does not reflect the tax implications directly tied to inflationary pressures, which is the crux of bracket creep.