How does inflation affect personal finance?

Inflation significantly influences personal finance by reducing purchasing power, which means that over time, people are able to buy fewer goods and services with the same amount of money. As prices rise due to inflation, the cost of living increases, which can strain budgets if income does not keep pace with these rising costs. For instance, if someone’s income remains stagnant while the prices of essentials like food, fuel, and housing rise, they will find their financial situation increasingly difficult, as their ability to afford basic necessities diminishes.

In contrast, the other options do not accurately reflect the broader impact of inflation on an individual's financial situation. For example, while income might rise in scenarios with inflation, this is not universally true for all workers, especially those on fixed salaries, who do not receive automatic cost-of-living raises. Additionally, inflation generally impacts both short-term and long-term investments, contrary to the belief that it has no effect on long-term investments; even well-structured investments can lose value in real terms if inflation outpaces their returns. Furthermore, inflation does not discriminate between individuals and large corporations, since both entities experience the impact of rising costs.