How does inflation generally affect consumer purchasing power?

Inflation refers to the general increase in prices of goods and services over time, which typically leads to a decrease in consumer purchasing power. When inflation occurs, each unit of currency buys fewer goods and services than it did previously. This erosion of purchasing power means that consumers are able to afford less with the same amount of money compared to before inflation began to rise.

For instance, if inflation is at a rate of 3%, then over time, if your income does not increase at the same rate, you effectively have less money to spend on the same items, as those items now cost more. Thus, when consumers face inflation, they find that their money does not stretch as far as it used to, leading to a decrease in their purchasing capability.

Understanding this relationship between inflation and purchasing power is crucial, as it impacts how consumers budget and plan for their financial future.