What is the impact of inflation on purchasing power?

Inflation erodes purchasing power because it refers to the general rise in prices of goods and services in an economy over time. When inflation occurs, the amount of money you have buys fewer items than it did previously. This decrease in the value of money means that consumers need to spend more to maintain the same standard of living.

For instance, if the inflation rate is 3%, a product that costs $100 today will cost $103 a year from now. Therefore, if an individual's income does not increase by at least 3%, they will be able to afford less than they could before, demonstrating the erosion of purchasing power. This relationship underscores the importance of understanding inflation when considering economic wellbeing and personal finances.