Purchasing Power
The quantity of goods or services a unit of currency can buy, eroded by inflation and enhanced by deflation.
What is Purchasing Power?
Purchasing power is the real value of a unit of currency—the quantity of goods, services, or assets it can buy at a given time and place. It is distinct from nominal (face) value: a dollar today buys less than a dollar did in 1990 because inflation has eroded its purchasing power over time. Purchasing power declines when the general price level rises (inflation) and increases when prices fall (deflation). Real wages, real interest rates, and real returns on investments all adjust nominal values for purchasing power changes to reveal what is actually gained or lost in terms of economic resources. Maintaining or growing purchasing power is a core objective of personal financial planning: savings, pension funds, and investment portfolios must generate real returns (nominal return minus inflation) to protect living standards over time.
Example
A dollar in 1990 had the purchasing power equivalent of approximately $2.35 in 2023, according to the Bureau of Labor Statistics CPI inflation calculator. This means that a consumer good priced at $1.00 in 1990 would cost roughly $2.35 in 2023 if it rose at the average inflation rate. Conversely, a retiree receiving a fixed $1,000 monthly pension in 1990 would have experienced a 57% decline in purchasing power by 2023 if the pension was not inflation-adjusted, highlighting the importance of cost-of-living adjustments (COLA) in retirement income.
Source: Bureau of Labor Statistics — CPI Inflation Calculator