Definition
Purchasing power declines with inflation—each dollar buys fewer goods over time. The cumulative effect is dramatic: $1 in 1970 had the same purchasing power as $8+ today. Maintaining purchasing power is the minimum return goal for long-term investors. Investments must earn at least the inflation rate to preserve real value; earning above inflation generates real wealth growth.
lightbulb Example
An investor earns 3% annually in a savings account while inflation runs 4%. Real return = -1%. After 20 years, $100,000 grows to $180,611 nominally but is worth only $132,845 in today's dollars—purchasing power has actually declined.
verified_user Key Points
- Declines with inflation over time
- $1 in 1970 ≈ $8+ today
- Investments must exceed inflation to preserve real value
- Real (inflation-adjusted) returns measure true wealth growth