What is Purchasing Power?

Purchasing power is the amount of goods and services that a unit of currency can buy, used to compare wealth across time (inflation) and across places (currency exchange plus local prices).

Purchasing power declines with inflation: CHF 100 in 2000 buys roughly what CHF 75 buys today. Real income (nominal income deflated by inflation) is the right measure of standard of living growth.

Purchasing power parity (PPP) compares currencies by what they actually buy locally rather than by exchange rate. The Big Mac Index is a popular illustration: in 2026, a Big Mac costs CHF 7.30 in Switzerland but USD 5.50 in the US, implying the Swiss franc is overvalued versus the dollar.

Example

A retiree drawing CHF 60,000/year today will need around CHF 89,000/year in 20 years to maintain the same purchasing power, assuming 2% annual inflation.

Related terms

Cost of Living

The cost of living is the amount of money needed to maintain a certain standard of living in a particular place, covering housing, food, transport, healthcare, utilities, taxes and other essentials.

Budget

A budget is a written plan that allocates expected income to spending, saving and debt repayment categories over a defined period, used to control finances and reach goals.

Savings Rate

The savings rate is the percentage of after-tax income that a household saves rather than spends, a key driver of long-term wealth and the timeline to financial independence.

Social Security

Social Security in the US (AHV/AVS in Switzerland, NI in the UK) is a government-run social-insurance programme that provides retirement, disability and survivor benefits to qualifying workers and their families, funded through payroll taxes.

Frequently asked questions

How does inflation affect purchasing power?+

2% inflation roughly halves purchasing power over 35 years; 5% inflation halves it in 14 years.

What is real vs nominal income?+

Nominal is the headline number; real is nominal adjusted for inflation — the true change in purchasing power.

How can I protect purchasing power?+

Invest in assets historically beating inflation (stocks, real estate, inflation-linked bonds), not cash.