Government tries to control inflation through monetary policy. It is the Fed s job to try to keep inflation at low levels. It uses the tools discussed yesterday to do this. That means our income is worth less and we cannot buy the same amount as we used to. This is a very simplified example just to show you how inflation reduces buying power.
Many companies offer a cost of living wage increase every year.
What this means is that our salaries are tied to inflation and rise as inflation rises. Such increases are only aimed to make sure that employees are as well off as they were the prior year.