Purchasing power
How much a given amount of money can actually buy, which falls when prices rise faster than income or savings grow.
What it means
Purchasing power measures the real buying capacity of money. A dollar today does not buy the same amount as a dollar 20 years ago, because prices have risen. When inflation is positive, the purchasing power of cash falls over time.
For households, what matters is whether income and savings grow faster than prices. A raise smaller than inflation is a cut in purchasing power. Purchasing power also differs by place: the same salary goes further in a lower-cost area.
Example
Suppose prices rise 3% a year for ten years. $100 kept in a drawer would then buy only about what $74 buys today, because $100 ÷ 1.03^10 is about $74.41.
How it’s used
- Evaluating whether a raise keeps up with rising costs
- Planning long-term savings and retirement income
- Comparing what a salary is worth in different cities
See it in the data: Hourly pay as paid vs. in today’s dollars →
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.