If individuals in the U.S. want to take strict control of their finances and avoid the issues posed by long-term cyclical debt, for example, they may need to follow economic news trends and learn how to use them in the quest to both save and make money. With nearly real-time news now available over the internet, it's simple to follow fluctuations in regularly released data.
Inflation and Unemployment: The Key Consumer Economic Data Trends
In terms of understanding economic data trends and using them to your advantage, inflation and unemployment represent two of the most important economic factors because they highlight the general cost of living and status of the constantly evolving labor market. While inflation is defined as a general increase in prices and fall in the purchasing value of money, for example, labor market statistics can reveal the national rate of employment and the financial prospects for job seekers throughout the country.
When it comes to managing your finances, it is important to be proactive and understand how these factors work in tandem with one another. For example, you will see that the cost of living climbed steadily for three months between May and July of 2013.
While the unemployment rate then had fallen to just 7.4% during this time, economists have suggested that this rate of job growth had been distorted by the creation of part-time work in low-wage industries. This forced White House policymakers to monitor the sustained rise in inflation carefully, as a situation where the cost of living continues to rise disproportionately to the national wage could cause a significant downturn in the economic fortunes of U.S. residents.
As a homeowner or consumer you may need to monitor these trends. Regardless of whether or not you have a job, it is crucial to budget your income and determine how much disposable cash you have available each month. Use resources such as the U.S. Inflation Calculator to view monthly rates and identify any prominent trends. In instances where inflation is rising out of proportion to your level of disposable income, you could choose to adopt a more conservative approach to spending and borrowing.
Interest Rates: Diminishing Debt and Irresponsible Borrowing
On a similar note, consumers who are looking to manage their finances must understand the nature and importance of interest rates. As consumer confidence soared between March and June of 2013, borrowing also increased heavily in the real estate and automotive markets. Auto lending in particular increased by $20 billion during the second financial quarter and this represented the single biggest gain in more than seven years. While government-backed low interest rates had been at the heart of this increased rate of borrowing, economists had already warned that the scenario may create instability and trigger long-term inflation.
As a consumer, you must remember that low interest rates are often contrived by governments that wish to reduce the cost of secured lending and encourage a greater level of reinvestment into the economy. While this is a standard economic practice, the prime interest rate at which you borrow is subject to change and subsequently have an impact on the long-term value of your investments. It is therefore your responsibility to invest and spend cautiously, as a failure to appreciate the fluctuating nature of interest rates and their vulnerability to government manipulation could ultimately lead you to spend outside of your means.
As the recent economic decline has shown, governments tend to adopt extreme fiscal measures during periods of recovery. While the Fed has reduced interest rates in a bid to encourage consumer spending, this doesn't mean you should splurge on a new car or justify some other extravagant debt. It is crucial that you resist the urge to overspend when interest rates fall, and instead make purchasing decisions based solely on your disposable income levels, existing debt liability and the long-term value of any potential investment. In short, low interest rates need to be seen as an opportunity to get ahead on your bills, not to take on more payments.
The Bottom Line
While there is a world of difference between investing in the forex market and buying monthly groceries, the fundamental goals of achieving value for your money and establishing a healthy return remain unchanged.
Just as a trader can use economic data trends to evaluate his or her investment options and make a responsible decision, consumers can also apply their understanding of inflation, interest rates and the labor market to determine their spending outlook and successfully manage their personal finances.