Can the Average Consumer Wait Out Inflation? Probably Not

Well into the pandemic, an amazing thing happened. Even with all of the shutdowns, because of the federal fiscal aid, people survived, and many increased their savings. (After all, where were they going to spend their money/?)

Now comes the bad news. An inflation wave has kicked up costs for consumers at a year-over-year 8.6% rate as of May (June’s numbers coming out on July 13). Credit card use is rising while savings are dropping and the hope of economists that most consumers would be able to hold out until inflation cooled is now up in smoke. That’s potentially big trouble for the economy.

There was a big uptick in excess personal savings due to the pandemic, which is “the cumulative amount by which personal saving during the pandemic has exceeded a counterfactual path without COVID-19,” according to the Federal Reserve Bank of New York. How much it ran to depends on the source. The New York Fed said $1.6 trillion in December 2020. The Wall Street Journal quoted Moody’s Analytics at $2.7 trillion at the end of 2021, a number that TD Economics also used.

There was also a drop in credit card use, which hit $858.7 billion in March 2020 but would plummet to $739.1 billion 14 months after, as Federal Reserve data shows.

All that has changed. Credit card and other revolving credit plans are back up to $879 billion as of June 22. The personal savings rate, according to Bureau of Economic Analysis data, dropped from a high of 39.8% in April 2020 to 5.2% in April 2022 and 5.4% in May. The river of funds filling savings accounts had dropped to a trickle, with a lower rate since 1959 only seen in the runup to the Great Recession, from 2003 to 2008.

Then there are real wages—what’s left after taking inflation into account. Between May 2021 and May 2022, the average dropped 3.9%, as Bureau of Labor Statistics data shows.

As Moody’s told the Journal, most households have some money in their accounts to soften the effects of higher prices. Except, do they? Averages can be highly misleading without detailed information about distributions.

As savings drop and credit limits get pushed, eventually a time will come when more and more consumers have to slow their spending. This is a disaster for the economy, as nearly 70% of GDP is consumer spending. That has immediate effects on retail, incomes of companies, the ability to pay elevated rents, the need for logistics, and much more that affects commercial real estate.