Final answer:
When the consumer price index, or 'cost-of-living' index rises, the purchasing power of the dollar decreases.
Step-by-step explanation:
The consumer price index (CPI) measures the average change over time in prices paid by urban consumers for a market basket of consumer goods and services. If the CPI increases, it means that the general level of prices for goods and services has risen. As a result, the same amount of money can buy fewer goods and services, leading to a decrease in purchasing power.
For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could beforehand.