How does inflation generally affect people’s purchasing power?

Inflation generally decreases purchasing power because it leads to an increase in the prices of goods and services over time. When inflation occurs, the same amount of money buys fewer goods than it did previously. For example, if the inflation rate is high, and your wages do not increase at the same rate, you will find that you can afford less with your income, effectively reducing your purchasing power.

As prices rise, individuals may have to allocate more of their income to essential expenses, such as food and housing, leaving less discretionary income available for savings or other purchases. This erodes the value of money over time, meaning that the purchasing power of consumers diminishes with rising inflation unless wages or income rise correspondingly to offset this effect. This relationship highlights the importance of considering inflation when planning personal finances, as it can significantly impact long-term financial goals and daily budgeting.