What is Purchasing Power?

Have you ever gone to the grocery store, bought your usual items, and walked out wondering how the total got so high? Or have you noticed that your paycheck is disappearing faster than it used to? You are not imagining things, and you are NOT ALONE!

These moments are clear signs of shifting purchasing power. While it may sound like a complicated economic term, purchasing power affects your daily life in very real ways, from buying groceries and saving for retirement to owning a home.

In this article, we will answer:

• What does purchasing power mean?
• What causes your purchasing power to rise and fall?
• How does purchasing power impact your finances?

What Does Purchasing Power Mean?

Purchasing power, also called “buying power” or “spending power,” refers to how much you can buy with a certain amount of money. In simple terms, it answers the question: How far does your money go?

For example, if $100 buys you a full cart of groceries today, but only half a cart a few years from now, then your purchasing power has decreased. On the other hand, if your income or savings grow faster than prices rise, that means your purchasing power has increased.

Bottom Line: Purchasing power isn’t just about how much money you have—it’s about what that money can actually do for you.

What Affects Purchasing Power?

Several factors influence your purchasing power, and many of them are beyond your control. The most common include:

1. Inflation

Inflation is the most well-known factor that affects purchasing power. It refers to the gradual rise in prices for goods and services over time. When inflation increases, each dollar buys less than it did before.

Even moderate inflation with small yearly increases will have a noticeable impact over the long term. For instance, if prices increase steadily year after year, the same income will cover fewer expenses unless your earnings or savings also grow.

2. Interest Rates

Interest rates affect your purchasing power in two important ways: saving and borrowing.

• For savers, higher interest rates can help money grow faster in money market accounts, certificates of deposit, and other savings accounts. This high APY (annual percentage yield) helps offset the effects of inflation and protect your purchasing power.
• For borrowers, interest rates influence how much it costs to finance large purchases like homes, vehicles, or renovations. If there is high APR (annual percentage rate), then borrowing becomes more expensive. In the end, this can impact your budget if you have loans or a mortgage.

3. Income and Wage Growth

Purchasing power may also depend on how much money you earn. If your income increases faster than prices, your money goes further. But if your income stays the same while prices rise, your purchasing power declines. That’s why it is crucial to make sure your income stays aligned with cost-of-living changes. Otherwise, you will fall behind financially.

4. Taxes

Taxes directly impact how much of your income you are allowed to use. Higher taxes can reduce take-home pay, limiting your spending and saving power. Lower taxes or tax-advantaged accounts—like IRAs—can help preserve more of your income. This allows your money to stretch further.

5. Supply and Demand

When the demand for goods and services is high while supply is limited, prices tend to rise. Such imbalances happen during seasonal changes, supply chain disruptions, or shifts in consumer behavior. Therefore, if prices increase because items are becoming harder to find or more expensive to produce, your purchasing power declines—even if your income hasn’t changed.

An obvious example is the impact of the COVID-19 pandemic, which created widespread supply chain disruptions and sudden shifts in demand. Fewer workers were available to produce goods, limiting how much could be manufactured and delivered. At the same time, consumer behavior changed as people began purchasing essentials in unusually large quantities. This combination pushed prices higher for everyday items like cleaning supplies, toilet paper, and basic food items.

6. Economic Conditions

The health of the broader economy plays an important role as well. In a strong economy with steady job growth, people benefit from higher wages and more financial opportunities. On the other hand, during economic slowdowns or periods of uncertainty, wage growth may slow while prices continue to rise. This puts pressure on your purchasing power.

How Can You Improve Your Purchasing Power?

So, what is the big takeaway? While you cannot control inflation or the economy, you can still take steps to help your money keep its value. One of the best methods is to put your money into financial products that make your money work harder for you.

Academy Bank offers solutions designed to protect your purchasing power:

• Interest-Earning Savings Accounts: Grow your money with a money market account¹ or certificate of deposit,² helping you offset the effects of rising prices.
• Retirement Products: Money Market IRAs and CD IRAs^3,4 offer tax-advantaged ways to grow long-term savings, supporting your purchasing power throughout your retirement years.
• Home Equity and Mortgage Options: Use a home equity line of credit (HELOC)⁵ or mortgage⁶ to pursue big-ticket goals at predictable rates. You may also consider refinancing to reduce interest costs and free up money for other priorities.

With a strategic financial plan, you can protect or even strengthen your purchasing power. Visit Academy Bank online or in person to find the best solutions for your financial goals.

Online Solutions

Banks Near Me