How does inflation typically affect purchasing power?

Inflation typically decreases purchasing power because it leads to a rise in the general price level of goods and services over time. When prices increase, each unit of currency buys fewer goods and services than it did previously. For example, if inflation is at a rate of 3%, and your income remains the same, you can buy less with that income because the cost of everyday items has gone up.

This means that consumers may find their money does not stretch as far as it did before inflation occurred. Consequently, individuals may need to adjust their budgets, buy cheaper alternatives, or reduce their overall spending because their existing wages or savings no longer suffice to maintain their previous standard of living. This relationship between inflation and purchasing power is a fundamental aspect of economic understanding, influencing decisions ranging from spending to saving.