What effect does inflation have on purchasing power?

Inflation refers to the general increase in prices of goods and services over time, which typically leads to a decrease in purchasing power. As prices rise, the amount of goods and services that can be bought with a given amount of money diminishes. This means that even though individuals may receive the same salary or income, they will be able to purchase fewer items than before inflation took effect.

For example, if the inflation rate is 3%, an item that costs $100 this year will cost $103 the next year. If an individual's income does not increase by at least this percentage, their ability to purchase that item diminishes, effectively reducing their purchasing power.

The concepts of inflation and purchasing power are crucial for understanding economic health and personal finance. This reduction in purchasing power affects individuals across the economic spectrum, not just the wealthier individuals, as everyone feels the increased cost of living.