What is Purchasing Power?

Purchasing power is the amount of goods and services you can buy with a certain amount of money. When prices rise (inflation) but your income doesn't, your purchasing power declines.

Purchasing power and inflation

Suppose you earn $2,000 per month. With that amount, you can buy a certain quantity of groceries, gasoline and other products today. If inflation is 5% and your salary doesn't increase, next year you can buy approximately 5% less with that same $2,000. Your nominal income has stayed the same, but your real purchasing power has declined.

How to calculate purchasing power?

To calculate how much purchasing power you've lost or gained, you need to look at the ratio between your income increase and inflation:

  • Purchasing power increase: your income rises more than inflation
  • Purchasing power equal: your income rises as much as inflation
  • Purchasing power decline: your income rises less than inflation (or falls)

Example: With 4% inflation and 2% wage increase, your purchasing power declines by approximately 2%. With 4% inflation and 5% wage increase, your purchasing power rises by approximately 1%.

Factors affecting purchasing power

Inflation

The main factor. High inflation means prices rise quickly and your purchasing power declines faster if your income doesn't keep up.

Wage development

If your salary is annually indexed to inflation, your purchasing power stays level. Many collective agreements contain provisions for wage indexation.

Taxes and contributions

Changes in tax rates and social contributions also affect your net income and thus your purchasing power.

Individual spending pattern

Official inflation is an average. If your spending mainly goes to products that rise faster (for example, energy), you experience a greater loss of purchasing power.

Protecting purchasing power

There are various ways to protect your purchasing power:

  • Ask for wage indexation in your collective agreement or employment contract
  • Invest in assets that retain value during inflation
  • Build a buffer for unexpected costs
  • Compare prices and buy more consciously
  • Look for alternatives to expensive products and services

Calculate your own purchasing power

With our purchasing power calculator, you can precisely calculate how much your purchasing power has changed over the years. Enter your salary and wage increases to see if you've gained or lost ground. Also check the current inflation figures to know what the current inflation is.