Have you ever gone grocery shopping and noticed that $100 doesn’t seem to go as far as it used to? You’re not imagining things. Over time, rising prices can reduce how much your money can buy. Economists call this a loss of purchasing power.
What is purchasing power?
Purchasing power describes how much you can buy with a certain amount of money. When prices rise because of inflation, your money generally buys fewer goods and services.
For example, if prices increase by 5% but your income stays the same, you can afford less than before. Your bank balance hasn’t necessarily changed, but the value of what that money can purchase has.
This is happening now: U.S. consumer prices were up 3.7% over the year to September. BLS The October figure comes out Tuesday, Nov. 10.
A simple example
Imagine you have $100 to spend on groceries, and each bag costs $10. Now imagine prices rise by 20%.
Your money didn’t disappear. Its purchasing power declined. This is why inflation matters even when your savings account balance stays the same.
Notice: prices rose 20%, but your $100 buys about 17% less, not 20% less.
That’s because the drop is measured against what you could buy before: 8.3 bags is about 17% fewer than 10. It’s a common mix-up, and it works the same way in reverse.
Why it matters
Inflation affects more than groceries. It influences housing, transportation, healthcare, education and retirement planning.
If your savings earn 2% a year while inflation averages 3%, your money is growing in dollars but losing about 1% of its purchasing power each year.
That’s why investors distinguish between nominal returns and real returns:
- Nominal returns show how much your investment grows in dollars, before inflation.
- Real returns account for inflation, showing how much more you can actually buy.
Understanding the difference helps you see whether you’re actually building wealth or simply keeping up with rising prices.
One thing to remember
Having more dollars doesn’t always mean having more buying power.
The real question isn’t just how much money you have. It’s how much that money can purchase. When planning your financial future, protecting your purchasing power can be just as important as growing your savings.
Try it yourself: open the Grow Investments calculator and enter a $10,000 starting investment, $0 a month, 10 years, 2% yearly growth and 0% dividends. You’ll end up with a little over $12,000. Now compare: at 3% inflation, something that costs $10,000 today would cost about $13,440 in 10 years. More dollars, less buying power.
Stay sharp, stay organized.
Educational content, not personalized investment advice. The 2% return and 3% inflation rate are for illustration only. Source: BLS Consumer Price Index, September 2026.
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