The purchasing power of money can only be measured in relation to specific goods.
To do this, a basket of goods is compiled that contains the typical goods purchased by a household and is used as the basis for calculating the consumer price index. If the cost-of-living price index has increased (decreased), the purchasing power of money has decreased (increased) with respect to the goods in the basket. The purchasing power of money has therefore increased (decreased) if one monetary unit can buy more (fewer) goods than at an earlier point in time. Thus, the value of money and the price level behave inversely. If the purchasing power decreases while the nominal income remains the same, we speak of demonetization or inflation. If the purchasing power of money increases while income remains the same, we speak of deflation. In more general usage, the disposable income of a person or group of persons is also referred to as purchasing power.
