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The quantity of goods and services that can be purchased with a unit of currency, which decreases as inflation rises.
Purchasing power is why inflation matters to your personal finances. If inflation averages 3% per year, $100 today will buy only about $74 worth of goods in 10 years. This is the hidden tax of inflation. A savings account paying 1% while inflation runs at 3% means you are losing 2% of purchasing power annually. This is why investing in assets that outpace inflation (stocks, real estate, TIPS) is essential for long-term wealth preservation. Social Security payments are adjusted for inflation through COLAs (cost of living adjustments), but many other income sources like pensions may not be inflation-adjusted.