How does inflation affect purchasing power?

Inflation affects purchasing power in a significant way by reducing it as the cost of goods and services rises. When inflation occurs, the general price level of goods and services in an economy increases over time. This means that consumers will need to spend more money to purchase the same items they could have bought for less money previously.

As prices increase, the value of money decreases—the same amount of money now buys fewer goods and services than before, leading to a decrease in purchasing power. Consequently, individuals and households find that their income does not stretch as far as it did in a low-inflation environment, which can affect their ability to afford everyday necessities.

In contrast, options that suggest inflation increases or stabilizes purchasing power do not align with the economic principles surrounding inflation, as they ignore the direct relationship between rising prices and the diminishing value of currency. An assertion that inflation has no impact also fails to recognize the evident effects that rising prices have on consumers' economic wellbeing.