What impact does inflation typically have on purchasing power?

Inflation typically decreases purchasing power because it signifies a rise in the general price level of goods and services over time. When inflation occurs, each unit of currency buys fewer goods and services than it did previously. As prices increase, consumers find that their money does not stretch as far, leading to a decline in their overall purchasing capacity.

For instance, if the inflation rate is 5%, an item that cost $100 last year will now cost $105. If an individual’s income does not increase at the same rate as inflation, their ability to buy the same amount of goods diminishes. Consequently, despite having the same nominal income, the real value of that income is reduced, which clearly illustrates the negative effect inflation has on purchasing power.