How do economic indicators influence personal finances?

Economic indicators are numerical data used to provide a picture of a country’s current and future economic health. Fluctuations in these indicators can affect your personal finances in a variety of ways, from savings and loans to job security or consumer confidence.

This article describes key economic indicators and explores their potential impact on your personal finances, across two themes:

• Economic indicators: fundamental principles
• How to do it Economic growth indicators affect your finances personal

Economic indicators: fundamental principles

Economic indicators are calculated from economic information and provide an overview of a country’s economic health and performance. Policy makers, analysts and economists use these indicators to formulate strategies and make predictions about future trends.

Economic indicators are divided into three categories: lagging, coincident or leading.

Leading indicators

Leading indicators provide information and forecasts about future economic activity. Examples of leading indicators include:

• or stock market performancewhich reflects the performance and expectations of companies. A rising stock market can indicate optimism about the economy;
  ​
• os indicators of the construction sector. They represent future construction activity and help policymakers identify trends in the housing market;
  ​
• consumer confidence surveysas they provide a useful perspective on how people feel about their financial situation and spending habits.

Lagging indicators

Lagging indicators are economic statistics released after observing trends. Examples of lagging indicators:

• inflationwhich is the rate of increase in prices over a given period of time. It is calculated and reported after prices have already increased. This type of lagging indicator provides important information about the economy and is used to shape public policies;
  ​
• unemployment statisticsas they reflect the percentage of the active population (people theoretically able to work) unemployed during a retrospective period of time;
  ​
• changes in interest ratesdetermined by central banks in response to general economic trends. Central banks can decide to raise interest rates to slow inflation, or reduce them to encourage borrowing and consumption.

Coincident indicators

Coincident indicators provide a real-time snapshot of economic activity, helping to confirm the current state of the economy. Examples of coincident indicators are:

• GDP (Gross Domestic Product)which captures the performance of the various sectors of a country’s economy in a specific period of time (a quarter or a year), including exports, investments and household and state expenditure;
  ​
• retail sales. They provide real-time data on the population’s consumption decisions. These indicators are normally published monthly, allowing economists to closely monitor changes in consumer behavior;
  ​
• personal incomewhich reflects the average income of individuals or families in a country. Higher average income values ​​coincide with a stronger economy.

👉 You may be interested in: Financial plans: what is the impact of global events?

How Economic Growth Indicators Affect Your Personal Finances

Inflation

Inflation affects the overall cost of living, from food to bills, from insurance to the cost of essential services.

If your salary isn’t keeping up with inflation, you may need to cut spending, opt for cheaper products, reduce non-essential purchases or look for cheaper deals from energy suppliers. If you have savings, you may want to invest them in solutions that allow you to maintain purchasing power, so they don’t depreciate in value.

Interest rates

Short-term interest rates are set by central banks to ensure that there is neither too much money in circulation in the economy (which causes prices to rise) nor too little (which can lead to prices falling).

When monetary policy makers want to reduce the money supply (money in circulation), they raise the interest rate, making deposits of funds more attractive and reducing central bank lending. To increase the money supply, the central bank will reduce the interest rate, which facilitates borrowing and stimulates consumption.

These decisions can affect the amount you can borrow (such as a loan or home equity loan), the interest rate you pay, the growth of your savings and the market value of any fixed income financial solution.

An example of an action that can help limit the impact of interest rate changes is to opt for a fixed rate home loan instead of a variable rate.

Although the fixed interest rate may be higher at the time of negotiation than an indexed variable rate, the advantage is that there will be no unexpected increases. By opting for the fixed rate, you will know that the amount of the monthly payment will remain the same for the entire period of time that you have to pay it, regardless of the change in interest rates during that period.

Of course, there is a risk that interest rates set by the central bank will fall. As a result, the value of your fixed monthly payment will be comparatively higher than that of people who have contracted a variable rate product, who at that time benefit from a reduction in the monthly payment.

However, many people prefer the peace of mind of knowing what their fixed home costs will be over the next few years, without being exposed to potential increases that may not fit into their budget.