Purchasing Power
Pouvoir d'achat in French
Quick definition
Purchasing power is what your money can actually buy. Inflation erodes it a little every year, so a dollar kept as cash buys less and less over time even though the number on your statement never changes.
The slow leak
A dollar is not a fixed amount of stuff; it is a claim on whatever prices happen to be. As inflation pushes prices up, measured in Canada by the consumer price index, each dollar quietly buys less. Nothing dramatic happens in any single year, which is exactly what makes the leak dangerous over decades.
| After | At 2% inflation | At 3% inflation |
|---|---|---|
| 10 years | $82 | $74 |
| 20 years | $67 | $55 |
| 30 years | $55 | $41 |
Safe money that quietly shrinks
Cash feels safe because its dollar value never drops, but over decades that safety is an illusion: the table above is what "doing nothing" costs. This matters most for retirees, because a retirement can easily last 30 years. A plan that looks comfortable in today's dollars can run thin by the end if it ignores the fact that the last years of spending happen at much higher prices. Long-horizon planning has to be done in real dollars, meaning dollars adjusted for inflation.
The same adjustment applies to returns. The figure on your statement is the nominal return; what your money can newly buy is the real return, roughly the nominal return minus inflation. A 5% return during 3% inflation is about a 2% real gain, and that 2% is the part that actually moves you forward. The now-discontinued but still-traded real return bond was designed around exactly this idea, paying returns on top of CPI.
Built-in protection
Some income is defended automatically. CPP benefits are adjusted for inflation every January, so a CPP dollar keeps its purchasing power for life. OAS goes further, with adjustments every quarter. Growth assets help too: over long horizons, compound interest on a diversified portfolio has historically outrun inflation, which cash rarely does.
In Canada
In Canada, purchasing-power protection is built into the public pillars of retirement, since CPP, OAS and GIS are all indexed to CPI, but it is increasingly rare in workplace pensions, many of which pay fixed dollars or offer only partial indexation. That gap is worth checking before retirement: two pensions with the same starting payment can differ enormously in what they buy 25 years in.
Worked example: the 30-year retirement
Louise retires at 65 planning to spend $50,000 a year for 30 years. At 2.5% inflation, buying the same lifestyle at 95 costs roughly $105,000 a year in future dollars. If her plan treats $50,000 as a fixed number, it silently assumes her standard of living will fall by more than half. Planning in real dollars, and holding investments expected to earn more than inflation, is how she keeps the plan honest.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated August 2026