What happens to purchasing power as inflation increases?

As inflation increases, the general price level of goods and services rises. This phenomenon erodes the purchasing power of money, which means that each unit of currency buys fewer goods and services than it did before. For example, if the inflation rate is high, consumers will find that the same amount of money that once allowed them to purchase a certain quantity of goods can now buy significantly less as prices go up. Thus, consumers experience a decrease in their purchasing power, making it more challenging to afford the same standard of living.

This relationship is a fundamental concept in macroeconomics, as it highlights the impacts of inflation on economic agents' real wealth and their consumption capabilities. While some factors might influence purchasing power temporarily, the consistent pattern during periods of rising inflation is a decrease in purchasing power.