How does inflation affect purchasing power?

Inflation decreases purchasing power because it represents the rate at which the general level of prices for goods and services rises, eroding the value of money. When inflation occurs, each unit of currency buys fewer goods and services than it did before. For example, if inflation is at 3% and wages do not increase accordingly, consumers will find that their income can purchase less than it could in the past. This diminishing value of money means that consumers can afford fewer goods and services over time, effectively reducing their overall purchasing power. Understanding this relationship is critical for analyzing economic conditions and making informed financial decisions.