when a currency s purchasing power decreases due to excessive inflation serious negative economic consequences can arise these can include a higher cost of living higher interest rates that affect the global market and falling credit ratings all of these factors can contribute to an economic crisis 
governments institute policies and regulations to protect a currency s purchasing power and keep an economy healthy they also monitor economic data to stay on top of changing conditions for example the u s bureau of labor statistics bls measures price changes and announces those changes with cpi cpi is one of the measures of inflation and purchasing power it calculates the change in the weighted average of prices of consumer goods and services and in particular transportation food and medical care at a given time cpi can point to changes in the cost of living as well as deflation the cpi is just one official measure of purchasing power in the u s a concept related to purchasing power is purchasing price parity ppp ppp is an economic theory that estimates the amount by which an item should be adjusted for parity given two countries exchange rates ppp can be used to compare countries economic activity income levels and other relevant data concerning the cost of living or possible rates of inflation and deflation the world bank s international comparison program releases data on purchasing power parities between different countries 1purchasing power loss or gain refers to the decrease or increase in how much consumers can buy with a given amount of money consumers lose purchasing power when prices increase they gain purchasing power when prices decrease causes of purchasing power loss can include government regulations inflation and natural and human made disasters causes of purchasing power gain include deflation and technological innovation one example of purchasing power gain would be if laptop computers that cost 1 000 two years ago cost 500 today in the absence of inflation 1 000 will now buy a laptop plus an additional 500 worth of goods the great inflation of the 1970s to early 1980s devastated the purchasing power and standard of living of americans the rate of inflation skyrocketed to 14 2examples of purchasing power losshistorical examples of severe inflation and hyperinflation which can destroy a currency s purchasing power show us the various causes and effects of such phenomena sometimes expensive and devastating wars will cause an economic collapse in particular for the losing country this happened to germany after world war i wwi in the aftermath of wwi during the 1920s germany experienced extreme economic hardship and almost unprecedented hyperinflation due in part to the enormous amount of reparations germany had to pay unable to pay these reparations with the suspect german mark germany printed paper notes to buy foreign currencies resulting in high inflation rates that rendered the german mark valueless with a nonexistent purchasing power 3the effects of the loss of purchasing power in the aftermaths of the 2008 global financial crisis and the european sovereign debt crisis are remembered to this day due to increased globalization and the introduction of the euro currencies are inextricably linked and economic trouble can cross geographic boundaries as a result governments worldwide institute policies to control inflation protect purchasing power and prevent recessions for example in 2008 the u s federal reserve kept interest rates near zero and instituted a plan called quantitative easing qe quantitative easing initially controversial saw the u s federal reserve system fed buy government and other market securities to increase the money supply and lower interest rates the increase in capital spurred increased lending and created more liquidity the u s stopped its policy of quantitative easing once the economy stabilized the european central bank ecb also pursued quantitative easing to help stop deflation in the eurozone after the european sovereign debt crisis and bolster the euro s purchasing power the european economic and monetary union established strict regulations in the eurozone related to accurately reporting sovereign debt inflation and other financial data as a general rule countries attempt to keep inflation fixed at a rate of 2 moderate levels of inflation are acceptable high levels of deflation can lead to economic stagnation special considerationsretirees can be particularly aware of purchasing power loss since many of them live off of a fixed amount of money they must make sure that their investments earn a rate of return equal to or greater than the rate of inflation so that the value of their nest egg does not decrease each year debt securities and investments with fixed rates of returns are the most susceptible to purchasing power risk or inflation fixed annuities certificates of deposit cds and treasury bonds all fall into this category for instance a long term bond with a low fixed rate of return might fail to increase your investment during periods of inflation some investments or investing strategies can help protect investors against purchasing power risk for example treasury inflation protected securities tips adjust to keep up with rising prices commodities such as oil and metals may maintain pricing power during periods of inflation 