How does inflation affect purchasing power?

Inflation is defined as the general increase in prices of goods and services in an economy over a period of time. As inflation rises, the value of money diminishes, resulting in a decrease in purchasing power. This means that with a given amount of money, consumers are able to buy fewer goods and services than they could previously. For example, if the inflation rate is at 3%, something that cost $100 a year ago would cost approximately $103 today. Consequently, individuals need to spend more money to acquire the same items they could purchase before, leading to a reduction in purchasing power.

The other choices reflect misunderstandings about the relationship between inflation and purchasing power. While inflation does not increase purchasing power, it also does not have a neutral effect; rather, it consistently decreases purchasing power as prices rise. Lastly, inflation is not associated with a decrease in the prices of goods and services; instead, it is characterized by rising prices, which is the very essence of inflation itself.