What effect does inflation typically have on purchasing power?

Inflation typically decreases purchasing power. This occurs because when the general price levels of goods and services increase, the amount of money individuals can buy with a fixed amount decreases. In other words, as prices rise, each unit of currency buys fewer goods and services than it did before. For example, if inflation is at 3%, something that cost $100 last year will now cost $103, meaning that the same amount of money will not allow you to purchase as much as it did previously.

This phenomenon can affect individuals differently, particularly those on fixed incomes, as their income does not increase with inflation, making it harder for them to maintain their standard of living. However, the broader effect of inflation is a reduction in purchasing power for everyone who does not see a proportional increase in their income.