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What is purchasing power?

Purchasing power is the value of a sum of money in terms of goods or services.

Purchasing power is tied to inflation. As a result of inflation, the purchasing power of a unit of currency falls. Conversely, purchasing power increases as a result of deflation.

In the US, purchasing power is monitored through the Consumer Price Index. The Federal Reserve institutes policies and regulations to protect the dollar’s purchasing power, as do government entities in other countries for their respective currencies. With globalization, the relationship between currencies plays an increasingly significant role in national and global economies.

Purchasing power can sometimes be confused with collective buying power, which refers to consumer groups leveraging their size in exchange for discounts. A modern instance of collective buying power is when a company arranges a discount that will only go into effect if a pre-determined number of the applicable goods or services are sold. Companies can also gain access to high-quality employee benefits through collective buying power as part of a Professional Employer Organization (PEO).