In economic terms, what does inflation affect?

Inflation primarily affects the purchasing power of money. When inflation occurs, the prices of goods and services increase, meaning that consumers need more money to buy the same items they could previously purchase for less. As a result, if people's income does not increase at the same rate as inflation, their ability to buy products diminishes, leading to a decrease in their purchasing power.

This concept is fundamental in economics because it illustrates how inflation can erode the value of money, influencing consumer behavior and overall economic stability. While inflation may have indirect effects on employment levels, wealth distribution, and GDP, its direct impact is most clearly seen in how it affects individuals’ ability to purchase goods and services.