What it is
Purchasing power refers to the economic strength of a currency in terms of what it can acquire. When prices of goods and services rise, a unit of currency buys less, and its purchasing power decreases. Conversely, when prices fall, a unit of currency buys more, and its purchasing power increases. Inflation erodes purchasing power over time, while deflation enhances it. It's a fundamental concept for understanding the real value of wages, savings, and investments.
In markets and policy, central banks like the Federal Reserve aim to maintain stable prices to preserve purchasing power, often targeting a specific inflation rate. Economic data such as the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) inflation are closely watched to gauge changes in the cost of living and, by extension, purchasing power. Wage growth that lags behind inflation means a decline in workers' real purchasing power.
Why it matters
Changes in purchasing power directly affect your cost of living, the real value of your savings, and the returns on your investments. It dictates how far your money goes.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice