Inflation Reduces the Value of Money: Initially you may have been able to buy a certain item at a certain price, a loaf of bread for a dollar for instance. But after the effects of inflation you may have to pay more to purchase the same amount of the commodity, for instance the same loaf of bread may cost $1.50, $2.00 or even $2.50. Inflation reduces the value of money thus making you pay more in the process. As a result, the value of the money in hand gets reduced and the amount that you thought of depositing into savings is spent covering the additional costs of purchasing necessities. This reduction in the value of money directly affects the purchasing power. With the increase in the prices of basic commodities like sugar, petrol, vegetables etc. you need to spend more money to buy the same amount of goods. The problem lies in the fact that inflation causes the prices of products to rise but does your salary increase at the same rate? If not, you will have less and less to save as costs increase but your salary doesn’t keep up.