Purchasing Power
The quantity of goods and services that can be purchased with a unit of currency.
Definition
Purchasing power refers to the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is eroded by inflation — as prices rise, each dollar buys less. For example, $100 in 1990 had the purchasing power of approximately $240 in 2025 due to cumulative inflation. This is why nominal investment returns must be adjusted for inflation to determine real returns. Purchasing power parity (PPP) is used to compare economic productivity and living standards between countries. Protecting purchasing power is a primary goal of investing — assets like stocks, real estate, and TIPS historically outpace inflation over long periods.
Related Tools
Related Terms
Inflation
The rate at which the general level of prices for goods and services rises, eroding purchasing power.
EconomyConsumer Price Index (CPI)
A measure of the average change in prices paid by consumers for a basket of goods and services.
InvestingTime Value of Money
The concept that money available now is worth more than the same amount in the future.