What effect does an increase in inflation typically have on purchasing power?

An increase in inflation typically has the effect of decreasing purchasing power. When inflation rises, the overall price level of goods and services increases, meaning that consumers need to spend more money to purchase the same items they could buy for less previously. As a result, the value of money diminishes; individuals are able to buy fewer goods and services with the same amount of money.

For instance, if inflation is at 3%, the cost of living increases, and what a consumer could buy for $100 last year may now cost $103 this year. Consequently, the consumer's money does not stretch as far as it once did, negatively impacting their ability to make purchases and maintain their prior standard of living. This connection between inflation and purchasing power is a key element in understanding economic conditions and consumer behavior.