How does inflation impact purchasing power?

Inflation decreases purchasing power over time because it leads to a general rise in prices for goods and services. When inflation occurs, the same amount of money that could previously buy a certain quantity of goods or services will now buy less. This means that consumers need more money to purchase the same items, effectively reducing the value of their money.

For instance, if the inflation rate is 3%, and you have $100 today, after a year, that $100 could only buy what $97 could buy today, assuming prices rise in accordance with the inflation rate. As a result, individuals and households may find themselves needing to adjust their budgets, reduce spending, or find ways to earn additional income to maintain their standard of living.

In contrast, options that suggest inflation has no effect on purchasing power or that it increases purchasing power do not align with the economic principle of inflation's impact. Additionally, the idea that inflation makes fixed incomes more valuable misunderstands the effect of inflation, as fixed incomes do not adjust with rising prices, further diminishing purchasing power.