Purchasing power

What It Means

Purchasing power is the amount of goods and services a unit of money can buy. The Bureau of Labor Statistics (BLS) measures how it changes with the Consumer Price Index: as prices rise, each dollar buys less, so its purchasing power falls. A savings balance keeps its purchasing power only if it grows at least as fast as prices do.

How It Sounds at Home

• "A hundred dollars doesn't go as far as it used to."
• "Our savings are growing, but they buy less."
• "This used to be a dollar."

The Breakdown

Worked example. You put $5,000 in savings and leave it for 5 years while prices rise 3.4% a year, the CPI-U's rise in the 12 months through August 2026. The interest ratesInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more are examples.

What the result means. The balance goes up in both rows, yet at 1% the money buys about 11% less than it does today, because prices grew faster than the account. At 4% it stays ahead of prices and gains a little buying power. Comparing the interest rate with the inflation rateInflationA general rise in the prices of goods and services over time, so the same amount of money buys less than it did before. See more tells you which way your savings are heading.

A real example from BLS. A basket of goods that cost $500 in December 2021 cost $532.50 in December 2022, so the same $500 no longer covered it a year later.

Good to Know

BLS's free CPI Inflation Calculator on bls.gov compares what a dollar bought in one year with another, using the average CPI for each calendar year. It's a quick way to check what an old salary, price or savings balance equals today. Purchasing power also differs by place: the Bureau of Economic Analysis (BEA) publishes regional price parities comparing each state's price level with the national level.

Related Terms and Categories

• Inflation

  A general rise in the prices of goods and services over time, so the same amount of money buys less than it did before.

• Real income

  Income adjusted for inflation, so it measures what your pay can buy. The dollar amount before that adjustment is called nominal income.

• Cost of living

  What it costs to keep a certain standard of living, such as housing, food and transportation, in a given place at a given time.

• High-yield savings account

  A savings account paying a variable interest rate that's generally higher than a traditional savings account's, often offered by online banks.

• APY

  A yearly rate showing the total interest a deposit account pays, counting how often interest compounds, as defined by federal Truth in Savings rules.

• Compound interest

  Interest paid on your original amount and on the interest it has already earned, so each year's interest is a little bigger than the last.

Household money and budgeting