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Inflation’s Effect on Purchasing Power

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Inflation is a reality that affects everyone’s finances. Whether you’re a student, a professional, or a retiree, understanding inflation’s effect on your finances is crucial for making informed financial decisions. In this blog, we’ll explore the concept of inflation and how it impacts your ability to buy goods and services.

What is Purchasing Power?

Purchasing power is the number of goods or services that a unit of currency, like a dollar bill, can buy. This power applies to all forms of money and can change or drop over time.

When purchasing power drops, money becomes less valuable or useful. This phenomenon leads to a rise in product costs, decreasing the number of products the average person can afford.

What is Inflation?

One of the main reasons that purchasing power decreases is inflation. When price inflation occurs, it drives the average cost of everyday goods, which decreases a person’s ability to afford them as their income remains the same. There are several reasons why inflation may occur:

  • Increases in production cost
  • Surges in demand for a wide range of goods
  • Changes in government fiscal policy

While purchasing power measures what a unit of currency can buy, inflation measures the price of said goods. Inflation is a global phenomenon, but the United States is currently experiencing higher rates than several countries like Japan, France, and Canada.

Consumer Price Index (CPI)

One way of measuring inflation is using the consumer price index (CPI). To represent overall consumer spending patterns, the United States Bureau of Labor Statistics estimates price changes for a “basket of goods.” The price difference is what defines the rate of inflation.

The CPI is based on tracking the price change of 94,000 consumer goods and services. The items include the cost of living for more than 200 categories, covering everything from transportation to food and medical care.

How Does Inflation & Purchasing Power Affect You?

Purchasing power affects you more than you think, and inflation affects you even more. The effect purchasing power and inflation have on our economy can place stress on our daily buying and spending habits.

While purchasing power tells us how much you can buy with your money, inflation measures and reflects the rising costs of those products. When excessive inflation occurs, our purchasing power decreases and results in higher costs of living, high-interest rates, and falling credit ratings.

How Gravity Lending Can Help

Do you have questions on how purchasing power and inflation affect your financial plan? Gravity Lending can help. We are a premium fintech company providing custom, low-interest-rate refinancing for auto loans, student loans, and credit cards. Contact us today to get help with your finances!