What Is Purchasing Power? The Simple Guide to Understanding Why Your Money Buys Less Every Year
By: Compiled from various sources | Published on Feb 28,2026
Category Beginner
Description: Confused about purchasing power? Here's a simple, honest explanation of what it is, why it matters, and how it affects your daily life — no jargon, just clarity.
Let me tell you something you've probably noticed.
Five years ago, ₹100 could buy you a decent meal at a restaurant. Today, that same ₹100 barely covers an appetizer.
Ten years ago, ₹50,000 felt like a substantial monthly salary. Today, it feels tight even for basic expenses.
Your parents talk about how a movie ticket used to cost ₹5, and now it's ₹200. How they bought their first car for what seems like pocket change today.
And you're wondering — am I earning less? Is money worth less? Why does everything feel more expensive even though my salary keeps going up?
The answer is purchasing power. And understanding it is one of the most important economic concepts for making sense of your financial life.
Because here's the uncomfortable truth: Your salary might be increasing every year, but if your purchasing power is decreasing, you're actually getting poorer — even though the numbers in your bank account are getting bigger.
This isn't abstract economics. This is why you feel financially squeezed despite earning more than you did five years ago. This is why your parents' salaries sound impossibly low but they lived comfortably. This is why saving money isn't as simple as just putting cash aside.
So let's break it down. Simply. Clearly. Let's talk about what purchasing power actually is, why it changes, how it affects you, and what you can do about it.
What Is Purchasing Power? The Simplest Possible Definition
Purchasing power is the amount of goods and services that one unit of money can buy.
That's it. That's the whole concept.
Another way to say it: How much "stuff" your money can actually get you.
Example:
If ₹100 could buy you 5 apples last year, but this year it can only buy you 4 apples (because apple prices increased), your purchasing power has decreased by 20%.
The number (₹100) is the same. But what it can BUY is less. That's purchasing power.
The key insight: Purchasing power is about what money can DO, not just the number itself.
Why Purchasing Power Changes Over Time
If purchasing power was stable, ₹100 today would buy the same amount as ₹100 ten years from now. But it doesn't. Why?
The Primary Culprit: Inflation
Inflation is the gradual increase in the general price level of goods and services over time.
When prices go up across the board (food, housing, transportation, everything), each unit of currency buys less than it used to.
Example:
- Year 1: ₹10,000 buys you a basket of goods (groceries, fuel, utilities)
- Year 2: Inflation is 5%. Prices rise by 5% on average
- Year 2: That same basket now costs ₹10,500. Your ₹10,000 can't buy the full basket anymore
Your purchasing power decreased by 5% because of 5% inflation.
This is why your grandparents' stories about cheap prices aren't because things were magically affordable "back then." The prices were lower, but so were wages — what mattered was purchasing power relative to income.
Real-Life Examples of Purchasing Power Changes
Let's make this concrete with examples you've definitely experienced.
Example 1: The Shrinking Cup of Chai
1990s: A cup of chai at a roadside stall cost ₹2
2026: That same cup of chai costs ₹10-15
The price increased 5-7 times.
But wages also increased. Let's say a laborer earned ₹50/day in the 1990s and earns ₹500/day now (10x increase).
In the 1990s: ₹50 salary could buy 25 cups of chai In 2026: ₹500 salary can buy 33-50 cups of chai
Purchasing power actually increased slightly for chai, even though the absolute price went up dramatically.
Example 2: Real Estate (Where Purchasing Power Decreased)
2000: A 2BHK apartment in a decent area of Mumbai cost ₹15 lakh
2026: That same apartment costs ₹1.5 crore (100x increase)
Salaries in 2000: Middle-class professional might earn ₹3 lakh/year
Salaries in 2026: Same professional earns ₹12 lakh/year (4x increase)
2000: Apartment cost 5 years of salary 2026: Apartment costs 12.5 years of salary
Purchasing power for real estate has decreased dramatically. It takes much longer to save for a home, even though nominal salaries increased.
Example 3: Technology (Where Purchasing Power Increased)
2006: A basic mobile phone cost ₹5,000-8,000. It could make calls and send texts. That's it.
2026: A smartphone with internet, camera, apps, and computing power costs ₹10,000-15,000
The nominal price is higher, but what you GET for that money is exponentially more.
For technology, purchasing power has actually increased — you get far more value per rupee spent.
Purchasing Power and Your Salary: The Real Story
This is where it gets personal. Let's say you got a 7% raise this year. Are you better off?
It depends on inflation.
Scenario 1: Inflation is 4%
- Salary increase: 7%
- Inflation: 4%
- Real increase in purchasing power: 3%
- You can actually buy 3% more stuff this year than last year. You're genuinely better off.
Scenario 2: Inflation is 8%
- Salary increase: 7%
- Inflation: 8%
- Real DECREASE in purchasing power: -1%
- Despite earning more money, you can buy LESS than you could last year. You're actually worse off.
This is why people say "my salary went up but I feel poorer."
If your salary increase doesn't keep pace with inflation, your purchasing power decreases. You're earning more numbers, but those numbers buy less stuff.
The formula for real income growth:
Real Income Growth = Nominal Salary Increase - Inflation Rate
If this number is positive, your purchasing power increased. If negative, your purchasing power decreased, even if your salary went up.
What Causes Purchasing Power to Decrease?
Understanding the causes helps you understand what's happening in the economy and your wallet.
Cause #1: Inflation (The Main Driver)
We already covered this, but let's go deeper into what causes inflation:
Demand-pull inflation: Too much money chasing too few goods. When everyone wants to buy something and supply can't keep up, prices rise.
Example: COVID caused supply chain disruptions. Fewer goods available. People still wanted to buy. Prices spiked.
Cost-push inflation: When the cost of producing goods increases (raw materials, wages, energy), producers pass those costs to consumers through higher prices.
Example: Oil prices rise → transportation costs rise → everything that needs to be transported becomes more expensive.
Monetary inflation: When governments print too much money, the currency loses value. More money in circulation chasing the same amount of goods = prices rise.
Cause #2: Currency Devaluation
If your country's currency weakens relative to other currencies, imported goods become more expensive.
Example:
- Year 1: ₹1 = $0.015 (₹67 = $1)
- Year 2: ₹1 = $0.012 (₹83 = $1)
The rupee weakened. Now anything imported (phones, electronics, oil, machinery) costs more in rupees.
Your rupee's purchasing power decreased for imported goods.
Cause #3: Supply Shocks
Natural disasters, wars, pandemics — anything that suddenly reduces supply of important goods.
Example: Drought destroys crops → food supply drops → food prices spike → your money buys less food.
Cause #4: Taxes and Fees
When governments increase taxes (GST, excise duty, property tax), the final price you pay increases.
Your purchasing power decreases because more of your money goes to taxes, less to actual goods.
Purchasing Power Around the World: Why Location Matters
₹10,000 doesn't have the same purchasing power everywhere in the world. Or even within the same country.
Purchasing Power Parity (PPP)
This is an economic concept that compares purchasing power across different countries.
Example:
A basket of goods costs $100 in the USA. The same basket costs ₹3,000 in India.
At the exchange rate of ₹83 = $1, that basket should cost ₹8,300 in India.
But it only costs ₹3,000. This means your purchasing power in India is higher for those specific goods.
This is why cost of living comparisons matter more than just currency exchange rates.
A $50,000 salary in San Francisco might provide less purchasing power (less comfortable lifestyle) than a ₹20 lakh salary in Mumbai, because San Francisco's cost of living is much higher.
Within the Same Country: City vs. Rural
₹50,000/month provides very different purchasing power depending on where you live.
In a tier-1 city (Mumbai, Delhi, Bangalore):
- Rent for 1BHK: ₹20,000-40,000
- After rent, you have ₹10,000-30,000 for everything else
- Purchasing power: Moderate to tight
In a tier-2/3 city or rural area:
- Rent for 1BHK: ₹5,000-10,000
- After rent, you have ₹40,000-45,000 for everything else
- Purchasing power: Comfortable
Same salary. Very different purchasing power.
How to Protect Your Purchasing Power
Understanding purchasing power is one thing. Protecting it is another.
Strategy #1: Invest, Don't Just Save Cash
The problem with cash: If you keep ₹1 lakh in cash (or a regular savings account earning 3-4% interest) while inflation is 6%, you're losing purchasing power.
Year 1: ₹1 lakh Year 2 (with 3% interest): ₹1,03,000 in cash, but with 6% inflation, you need ₹1,06,000 to buy the same goods.
Your purchasing power decreased by 3%.
Better options:
Investments that beat inflation:
- Stock market (historically 12-15% average returns, though variable)
- Mutual funds (equity funds for long-term)
- Real estate (though less liquid)
- Gold (hedge against inflation)
- Fixed deposits or bonds (if rates are above inflation)
The goal: Returns higher than inflation rate = purchasing power grows
Strategy #2: Negotiate Salary Increases Above Inflation
If inflation is 6-7%, a 5% raise means you're actually going backward.
Know the inflation rate (check government data or independent sources).
Negotiate for raises that exceed inflation — ideally by 3-5% above inflation for real income growth.
If your employer can't match inflation consistently, consider whether you're in the right role or industry.
Strategy #3: Increase Income Streams
Relying solely on salary means your purchasing power is at the mercy of your employer's raises and inflation.
Multiple income streams:
- Side business or freelancing
- Investment income (dividends, rental income, interest)
- Passive income (digital products, royalties)
More income sources = more protection against purchasing power erosion
Strategy #4: Reduce Expenses Strategically
You can't control inflation, but you can control your spending.
Focus on:
- Reducing or eliminating high-interest debt (this drains purchasing power)
- Buying quality items that last (cheaper items that break cost more over time)
- Negotiating bills (insurance, subscriptions, services)
- Taking advantage of sales and discounts strategically
This doesn't mean living cheaply. It means spending wisely so your money retains more purchasing power.
Strategy #5: Develop Inflation-Resistant Skills
Some professions maintain purchasing power better than others.
Skills in high demand (tech, healthcare, specialized trades) tend to command salaries that keep pace with or exceed inflation.
Generic, easily replaceable skills tend to see wage stagnation, meaning purchasing power decreases over time.
Invest in developing skills that remain in demand — this is one of the best hedges against purchasing power erosion.
Historical Perspective: How Purchasing Power Has Changed
Let's look at real examples to see how dramatically purchasing power can shift.
India: 1980s vs. 2026
1980s:
- Movie ticket: ₹5
- Middle-class monthly salary: ₹1,000-2,000
- 1 liter petrol: ₹5-6
- 1kg rice: ₹3-4
2026:
- Movie ticket: ₹200-400 (40-80x increase)
- Middle-class monthly salary: ₹50,000-80,000 (40-50x increase)
- 1 liter petrol: ₹100 (17x increase)
- 1kg rice: ₹50-60 (15x increase)
For movie tickets: Purchasing power stayed roughly the same (both increased ~40-50x)
For petrol and rice: Purchasing power actually improved slightly (salaries increased more than prices)
Overall: Purchasing power for basic goods has remained relatively stable, though for things like housing and education, it's decreased significantly.
Extreme Example: Hyperinflation
Zimbabwe (2008): Hyperinflation reached 89.7 sextillion percent per month.
What this meant: Prices doubled every 24 hours. A loaf of bread that cost $1 in the morning cost $2 by evening.
Money became worthless. People carried wheelbarrows of cash to buy basic items. Purchasing power was destroyed almost overnight.
This is an extreme case, but it shows what happens when purchasing power collapses completely.
Purchasing Power and Retirement Planning
This is where purchasing power really matters for long-term planning.
Scenario:
You're 30 years old. You want to retire at 60 with ₹50 lakh saved.
₹50 lakh today feels like a lot. But what will it be worth in 30 years?
If average inflation is 6% per year:
₹50 lakh today will have the purchasing power of only ₹8.7 lakh in 30 years.
That's why retirement calculators ask about inflation — they need to account for purchasing power erosion over decades.
You need to save enough not just in nominal terms, but in real terms (adjusted for inflation).
This often means saving much more than people initially think.
Measuring Purchasing Power: The Tools
How do economists and policymakers actually measure purchasing power?
Consumer Price Index (CPI)
Tracks the price of a basket of goods and services over time.
The basket includes: Food, housing, transportation, healthcare, education, entertainment
How it works:
- Measure the cost of the basket in Year 1 (base year)
- Measure the cost of the same basket in Year 2
- The percentage increase is the inflation rate
CPI tells you: How much more expensive life has become for the average consumer
Real Income
Your salary adjusted for inflation.
Formula: Real Income = Nominal Income / CPI
This tells you your actual purchasing power, not just the number on your paycheck.
The Big Mac Index
Created by The Economist magazine as a simple way to compare purchasing power across countries.
The concept: A Big Mac is basically the same product worldwide. Compare how much it costs in different countries to see relative purchasing power.
Example:
- Big Mac costs $5.50 in USA
- Big Mac costs ₹190 in India (about $2.30)
This suggests purchasing power for a Big Mac is higher in India than in the USA.
The Bottom Line
Purchasing power is how much goods and services your money can actually buy.
It's determined by:
- Inflation (prices rising over time)
- Your income level
- Currency value
- Cost of living in your location
Why it matters:
Your salary might increase every year, but if inflation increases faster, your purchasing power decreases — you're actually getting poorer even though you're earning more.
Protecting your purchasing power requires:
- Investing in assets that beat inflation (stocks, real estate, businesses)
- Negotiating salary increases above inflation rate
- Developing in-demand skills that command higher wages
- Creating multiple income streams
- Spending strategically to preserve purchasing power
Historical perspective:
Purchasing power constantly changes. What ₹100 bought 20 years ago is very different from what it buys today. This will continue.
For long-term planning (retirement, major purchases):
Always account for inflation. What seems like enough money today won't be enough in 20-30 years due to purchasing power erosion.
The key insight:
Stop thinking about money as just numbers. Think about what those numbers can actually DO for you — what they can buy, what lifestyle they support, what goals they enable.
That's purchasing power. And understanding it is essential for making smart financial decisions.
Because at the end of the day, you don't want more money for the sake of bigger numbers.
You want the purchasing power to live the life you want.
And those two things aren't always the same.
Now you know the difference. And knowing makes all the difference.
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