June 20, 2022
Inflation in America has reached a 40-year high. Hoping to bring price rises under control, on June 15th the Federal Reserve raised interest rates sharply, by 0.75 percentage points, to 1.75%. Inflation is rising as Americans return to pre-pandemic habits. Public-transport use, office occupancy and international travel are picking up. According to The Economist’s normalcy index activity in America is at nine-tenths of pre-pandemic levels, a new high.
As life is returning to normal, Americans’ unusually-high saving rate of the past two years is coming back down to earth. Personal savings amounted to just 4.4% of disposable incomes in April, a new low. The rate has been sliding since December 2021, when Americans saved 8.7% of their disposable incomes. April’s figure was the lowest since September 2008, in the midst of the global financial crisis, when the personal-savings rate dropped to 4.3%.
Many households are sitting on comfortable cushions. When spending on travel, restaurants and other leisure activities decreased during lockdowns, they stashed the spare cash away. The savings rate rocketed to a record 33% in April 2020, after the federal government issued its first stimulus cheque, a $1,200 boost. Another $600 followed in January 2021 and the savings rate jumped again; a third cheque of $1,400 in March 2021 was also accompanied by a rise in savings.
Americans’ savings are about $2trn (9% of GDP) higher than they would have been had the saving rate not risen during the pandemic. An all-time high of 68% of adults said they could cover a $400 emergency expense with cash or an equivalent in 2021. Even before the pandemic, savings rates were unusually high. The average rate over the ten years before February 2020 was about 7% of disposable income, compared with 5% in the previous decade. The Economist’s analysis shows that if savings stopped, the average American would still have money in the bank for some time. Had they continued to save at pre-pandemic rates, it would have taken them two more years to amass the financial cushion they’re sitting on now. A penny saved is a penny earned. ■