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Purchasing Power
Definition
Purchasing power is the amount of goods and services that a unit of currency can buy, which decreases as inflation rises.
Explanation
Purchasing power is directly affected by inflation. When prices rise, each dollar buys less. This is why investors seek returns that outpace inflation to preserve purchasing power over time. Cost of living adjustments (COLAs) help maintain purchasing power for retirees and workers.
Understanding purchasing power is crucial for long-term financial planning, especially for retirement savings that must stretch over decades of potential inflation.
Example
Due to inflation, $1,000 in 2000 had the purchasing power of about $1,800 in 2024, meaning prices nearly doubled over 24 years.