What is purchasing power?
In short
Purchasing power is how much you can actually buy with your money. It depends on prices, not just on the number written on your pay.
In plain words
A pound is a unit of account. What it is worth in the shops changes when prices change. If your income stays the same and the things you buy become more expensive, your purchasing power has fallen. If your pay rises faster than the prices you face, it has risen. Official inflation is an average basket. Your own purchasing power follows your rent, energy, food, travel, and childcare.
A simple example
Two years ago £40 covered a week's groceries you liked. The same list now costs £46, and your take-home pay has not moved. Those pounds do less, even if the number in your account looks familiar. If instead your pay rose by enough to buy that list and still have something left, your purchasing power rose even though every price tag went up.
Why it matters
Pay deals, pensions, and benefits are often judged against prices for this reason. A 4% pay rise is a real cut if the prices you pay have risen by 6%. Savings can shrink in the same quiet way: £1,000 in a low-interest account buys less after a bout of inflation. Some benefits and contracts are uprated with a price index to protect purchasing power, though the uprating usually lags prices people have already faced.
Easy to mix up
Purchasing power is not your salary, and it is not your wealth. A higher salary in a much more expensive city can buy less. It is also not the exchange rate, though a weaker pound can reduce what your money buys in imported goods. Real amounts — pay or GDP after inflation — are the ones that speak about purchasing power. Nominal amounts are the raw money figures.