The Impact of Inflation on Your Purchasing Power

Inflation touches every corner of our daily lives, quietly eroding the value of each dollar we spend. As prices rise, the same amount of money buys fewer goods and services, forcing families and individuals to adjust their budgets and rethink their spending habits.

In late 2025, the United States saw a Consumer Price Index (CPI) inflation rate of 3.0% over the previous 12 months, while core inflation (excluding food and energy) also held at 3.0%. This persistent level above the Federal Reserve’s 2% target signals that understanding and responding to inflation is more critical than ever.

How Inflation Is Measured

Inflation isn’t a single figure but the result of multiple indexes tracking price changes across various categories. Two primary measures guide policymakers, businesses, and consumers:

• Consumer Price Index (CPI): Tracks price changes for a broad basket of goods and services purchased by urban consumers, including food, housing, transportation, and medical care.
• Personal Consumption Expenditures (PCE) Price Index: Captures inflation based on consumer spending patterns and adjusts weights over time, favored by the Federal Reserve for its broader coverage.

Recent Inflation Trends (2024–2025)

After surging in the aftermath of the pandemic, inflation moderated but remained elevated. In September 2025, food prices rose by approximately 3.0% year-over-year, energy costs climbed 2.8%, and shelter jumped 3.6%. Month-to-month CPI readings in 2025 swung from slight dips (–0.1% in March) to sharper rises (+0.4% in August), reflecting both seasonal dynamics and underlying supply pressures.

Even as core inflation steadied, consumers felt persistent cost-of-living pressures facing families, especially those with stagnant wage growth. For every $100 spent a year ago, the equivalent buying power fell to just $97 today—an annual decrease of 3.0%.

Purchasing Power Over Time

The long-term story of the U.S. dollar is one of gradual but relentless decline. The Consumer Price Index: Purchasing Power of the Dollar fell from 31.7 in September 2024 to 30.8 in September 2025. Over decades, the impact is stark:

This table illustrates how significant erosion of your purchasing power unfolds. A $100 bill in 1975 buys just $16.40 worth of goods today, while $100 in 1925 is worth only $5 in 2025 dollars—an astonishing 95% loss over a century.

Impact on Consumers and Households

Inflation’s effects vary widely across income levels and spending habits. Lower-income households, which allocate a larger share of budgets to essentials like food and energy, feel the pinch most acutely. Real (inflation-adjusted) disposable income growth is projected to slow to 1.1% by mid-2026, down from 2.0% in mid-2025 and 2.8% in 2024.

In response, shoppers are altering their behavior. Nearly 47% of consumers report switching to store brands or using coupons more frequently to offset rising costs. Such shifts in buying patterns underscore the everyday adjustments families make to maintain financial stability amid persistent price increases.

Sector-Specific Effects

Inflation does not hit all sectors equally. Understanding where price pressures are most intense can help consumers anticipate budget adjustments:

• Food prices: Up 3.1% year-over-year, driven by higher input costs and supply chain disruptions.
• Energy costs: Overall increase of 2.8%; electricity soared 5.1%, utility gas plunged by double digits, while gasoline edged slightly down.
• Used and new vehicles: Used car prices climbed 5.1%, whereas new car inflation remained modest at 0.8%.

Underlying Drivers of Inflation

Several factors fuel current inflationary pressures. Continued ongoing supply chain disruptions and tariffs have driven up commodity prices—cocoa, for example, surged 500% since 2022. Wage growth has provided partial relief for workers, but in many cases it has not kept pace with rising living costs.

Meanwhile, central banks, including the Federal Reserve, have leaned on monetary policy and interest rates to cool demand. Higher borrowing costs help temper consumer spending and business investment, aiming to nudge inflation back toward target levels over time.

Shrinkflation and Hidden Effects

Beyond headline price increases, many products have undergone “shrinkflation”—the practice of reducing package sizes while maintaining prices. From chips to cleaning supplies, consumers may not notice the subtle downsizing until costs per unit actually spike, further eroding purchasing power in hidden ways.

Future Outlook

Economic forecasts suggest gradual cooling: PCE inflation is projected at 3.1% in 2025, easing to 2.4% in 2026 and reaching the Fed’s 2.0% target by 2027. Consumer spending growth on nondurables is expected at 2.3% in 2025 and 1.0% in 2026, while the services sector may see 1.9% growth in 2025.

Despite this moderation, discretionary spending faces continued constraints. As essential categories claim larger shares of household budgets, families may delay or downsize big-ticket purchases and travel plans.

Long-Term and Intergenerational Effects

Retirees and those on fixed incomes are especially vulnerable, as fixed benefits lose value over time. Social Security adjustments often lag actual inflation, eroding real income. Millennials and Gen Z entering the workforce must navigate a landscape where their paychecks stretch less far than those of previous generations, complicating goals like home ownership and retirement savings.

Protecting Your Finances

While inflation may feel unstoppable, consumers can take proactive steps to safeguard their budgets and preserve wealth:

• Review and compare prices regularly, seeking out bulk purchases or subscription discounts where feasible.
• Consider investments in assets that traditionally outpace inflation, such as Treasury Inflation-Protected Securities (TIPS) or certain real estate sectors.
• Refinance high-interest debt when rates fall, reducing monthly obligations and freeing up income.

Understanding inflation’s impact on your purchasing power is the first step toward financial resilience. By staying informed, adjusting spending patterns, and exploring protective strategies, you can navigate rising prices with confidence and preserve the value of your hard-earned dollars.