The Personal Consumption Expenditure Index (PCE) analyzes how prices vary for certain essential products and services during a given period.
The basis for this index is defined based on the analysis and monitoring of the costs of the most common and representative items that most families consume: food, clothing, transportation, among others. In other words, it is a monthly statistical measure of inflation.
For the PCE calculation to be accurate, both the population sample and the selection of products and services in the basket must represent people’s daily consumption. In addition, the parameters used in previous months or years must be taken into account so that the update is consistent, comparable, and measurable over time.
As we already know, the PCE is the reference indicator used by countries worldwide to estimate inflation. It is the index to which the central bank pays most attention in conducting its monetary policy. The PCE is a crucial indicator for making decisions such as raising or lowering interest rates, buying or selling bonds, among other things.
In this article, we will see how the PCE influences the economy and households’ finances.
What happens if the PCE goes up or down?
A high PCE will mean a decrease in the purchasing power of any citizen, especially if the income remains or decreased in the past months. Therefore, everyone’s finances will depend very much on the evolution of this indicator.
As we have said before, if it increases, working people will have less purchasing power to buy some products. The worrying thing is that it can also have an impact on one’s savings.
High inflation is very harmful because money loses value. Look what has been happening in Venezuela, or more mitigated in Argentina and other countries.
Is it a good thing when prices are going down? The immediate answer, without further consideration, is yes.
Are constant price declines a good thing? For the consumer, probably yes, but for the companies and the global economy, it is necessary to see prices grow. If goods cost more, they have value.
For example, a company can compete by lowering prices to a certain extent. But, in the end, it will sell below production costs and lose money. If the company loses money, it will have to close, leaving many people unemployed. Moreover, can a person afford more if their wages stagnate or even decline?
In summary, if inflation rises too high, we enter hyperinflation; if it falls, deflation. Neither of these scenarios is advisable. The first is because prices would skyrocket; the second is because the investment climate would not be attractive, and the economy would stagnate.
How does the PCE affect workers’ pocketbooks?
One of the main concerns about inflation is the cost of rent and mortgage loans. For a working person who receives a relatively low or medium salary, the rent cost may increase over time.
However, we know that it is difficult to increase the salary every year or even get a better-paying job that helps fight the prices growth.
Another concern is the growing prices of food and personal use products such as deodorant, soap, and others. In addition, the prices of public services such as water, gas, and electricity can increase in times of inflation, especially if these companies are private.
What can we do if the PCE index increases?
When income remains the same and consumption habits are not changed, more money must be spent on expenses. The situation described could cause people to consume their salary before the end of the month. While there is the possibility that prices will fall, families should review their budgets and adjust their purchases to avoid falling into bad debt.
Here are five tips for families or individuals to cope with inflation:
- Constantly inform yourself: Some institutions establish their annual projections. In addition, economists and international consultants comment on the subject. So, if we look at what the experts say, we can be forewarned about our future spending.
- Update the budget: As inflation changes, the budget must be adapted. Flexibility and foresight will be beneficial when it is necessary to change amounts. It is also essential to evaluate the day-to-day expenses that can be avoided. You can also take advantage of the discounts on daily use products.
- Evaluate large purchases: If a family decides to embark on a large purchase, such as a house, a car, or other expensive property, inflation should be a pivotal point in the project. One option is to anticipate the cost of the goods in a few years and save based on that price, not what it is today.
- Pay off debts quickly: It is important to check each person’s credit situation. Assessing payment behavior and the outstanding debt is key to determining the amount of money allocated for monthly purchases.
- Invest more than you save: Although the first instinct is to save as much money as possible, it is not always the best option to face times of economic ups and downs. Instead, a good option is to allocate a defined amount of money in an investment that offers higher annual returns than the inflation rate. In this way, the money will gain value instead of losing it.
There is no doubt that one of the most worrying issues for personal finances is inflation. The PCE is a fundamental indicator showing a state’s economic health.
We must consider the statistics and projections of the Central Bank of the country in which we reside. This institution is in charge of implementing inflation control policies.
The central bank can hike the interest rate (to stop inflation, cooling the economy) or decrease it(when inflation is meager and activity needs to be stimulated). As a result, there can be an impact on financial markets.
In addition, the PCE is also essential when it comes to the readjustment of workers’ salaries that are covered by labor contracts. The first thing to remember is that financial markets are constantly changing. So, we cannot be confident that things will remain the same even if we have a good salary.