How does inflation affect purchasing power?

Inflation decreases purchasing power because as the general price level of goods and services increases, each unit of currency buys fewer goods and services than it did before. This means that consumers will need to spend more money to purchase the same items they could have bought for less in the past.

For example, if the inflation rate rises, the cost of necessities, such as food and housing, will likely increase. This reduces individuals' ability to afford the same quantity of these goods, effectively diminishing the value of their money. Over time, if wages do not increase at the same rate as inflation, people may find it challenging to maintain their previous standard of living.

In contrast, other options present misconceptions about inflation's impact on purchasing power. It does not increase or stabilize purchasing power; rather, it consistently reduces the value of money over time. Understanding these dynamics is crucial for managing personal finances and making informed economic decisions.