Purchasing Power

Purchasing power refers to the amount of goods and services that a unit of currency can buy. It is directly affected by inflation, which erodes the value of money over time, reducing the quantity of goods and services that can be purchased with a given amount of currency. Understanding purchasing power is crucial for consumers, businesses, and investors, as it influences economic behavior and decision-making. A decline in purchasing power means that money has less value, often leading to changes in spending and investment patterns.

Example

If inflation increases by 3%, the purchasing power of $100 today would be equivalent to about $97 next year, as it would buy fewer goods and services.