What happens to purchasing power during inflation?

During inflation, the purchasing power of money decreases because as prices for goods and services rise, the same amount of money buys fewer items than it did before. This can occur as a result of increased demand for products, increased costs of production, or expansionary monetary policies that increase the money supply. For example, if the inflation rate is 3% and your income does not increase accordingly, you will be able to afford less with the same amount of money. Therefore, it becomes more challenging to maintain the same standard of living, as consumers have to spend more to get the same value they were accustomed to before inflation. In this context, understanding the impact of inflation on purchasing power is critical for making informed financial decisions.