Money over time
Purchasing power: what your dollars can actually buy
Use simple examples to distinguish nominal dollars from inflation-adjusted buying power.
A balance is only half the picture
Purchasing power describes what money can buy. A dollar balance can stay unchanged while the quantity it buys changes. BLS explains how to translate money into comparable price-period dollars in its guide to purchasing power and constant dollars.
Work through a price increase
Suppose a basket costs $100 at the start and $125 later. Prices rose 25%. A fixed $100 then buys 100 ÷ 125, or 80%, of the original basket. Its purchasing power fell 20%. The price increase and the purchasing-power loss have different denominators, so their percentages are not identical. This is an illustration, not a historical observation.
Convert dollars between dates
To express an earlier amount in later-period dollars, multiply it by the later CPI divided by the earlier CPI. If the index rises from 200 to 250, an earlier $1,000 corresponds to $1,250 at the later price level. To express a later amount in earlier-period dollars, reverse the index ratio.
Compare income on the same basis
Imagine income rises from $50,000 to $52,000 while the price level rises 5%. The later income equals about $49,524 in earlier-period dollars: $52,000 ÷ 1.05. That is roughly a 0.95% decline in buying power even though the paycheck increased 4%. This example ignores taxes and changes in purchases to isolate the arithmetic.
Use a consistent yardstick
Pick matching dates and the same index series for both endpoints. Avoid treating one household’s changing expenses as a substitute for a consistent price index. Try the inflation calculator and explore purchasing-power history to see the relationship over longer periods. Calculations describe past price comparisons; they do not predict future inflation.