What outcome does inflation have on purchasing power?

Inflation erodes purchasing power because it causes the overall price level of goods and services to rise. As prices increase, the same amount of money can buy fewer items than before, leading to a decrease in the value of money over time. For example, if inflation is at 3%, something that cost $100 a year ago would now cost $103. This means that without an equivalent increase in income, consumers would find themselves unable to maintain their previous level of consumption, as their money would not stretch as far as it used to.

This effect can be especially significant for fixed-income earners, whose income does not increase with inflation, making it even harder for them to afford necessary goods and services. Generally, as inflation persists, it tends to diminish what consumers can purchase, highlighting the critical relationship between inflation and purchasing power.