Inflation and Its Impact on Household Purchasing Power: A Global Economic Analysis

Abstract

This article examines the global relationship between inflation and household purchasing power during the period 2002–2025 and analyzes whether this relationship differs systematically between advanced and emerging economies. Global inflation peaked at 9.6 percent in September 2022 before declining to between 3.6 percent and 4.2 percent in 2025–2026. However, this decline in inflation does not account for earlier price increases, so the cumulative erosion of real household income since 2021 remains largely unexplained. Drawing on classical monetary theory(Fisher, 1911; Keynes, 1937; Friedman, 1968; Phillips, 1958) and structuralist traditions (Prebisch, 1950), as well as contemporary literature on the 2021–2026 inflation wave, this study constructs a data panel for forty countries during the period 2002–2025 and estimates a static effects model followed by a dynamic GMM. The results relating to the fixed effects show that inflation has a strong negative effect on real purchasing power (β = -0.312, p < 0.01), in addition to large effects from money supply growth (β = -0.145), exchange rate volatility (β = -0.089), oil shocks (β = -0.067), unemployment (β = -0.078), GDP growth (β = 0.221) and the budget balance (β = 0.056), with the model explaining 47% of the variance within the country (R² = 0.47). The Generalized Dynamic Moments (GMM) estimation confirms these results (β for inflation = -0.287, p < 0.01) and simultaneously reveals the study’s main conclusion: the interaction boundary between inflation and the status of a developing economy is statistically significant and negative (β = -0.164, p < 0.01), indicating that the negative impact of inflation on purchasing power is approximately 53% greater in developing and emerging economies compared to advanced economies—a total effect of -0.451 versus -0.287. These results support the structural hypothesis put forward by Prebisch (1950) and are consistent with recent data from international comparative studies by (Weber et al., 2025), implying that monetary policy alone is insufficient to protect household welfare in structurally fragile economies.