How does inflation impact purchasing power?

Inflation decreases purchasing power because as prices rise, the amount of goods or services that can be purchased with a given amount of money declines. When inflation occurs, the overall price level increases, meaning that the same quantity of money buys fewer goods or services than before. This erosion of currency value is particularly significant for consumers, as it impacts their ability to afford necessities and luxuries alike. As a result, individuals may find that their income does not stretch as far, leading to a decrease in their real purchasing power. Understanding this relationship between inflation and purchasing power is crucial for making informed financial decisions and budgeting effectively.