Savings Rate Falls As Inflation Takes A Bite

Posted by Jeffrey J. Roach, PhD, Chief Economist

Friday, May 27, 2022

Savings Rate Falls As Inflation Takes A Bite

The latest personal income and spending data from the Bureau of Economic Analysis show that part of the driver of spending growth in April was from savings. Another engine driving consumer spending was credit card usage but first, consider the savings rate.

Real consumer spending rose 0.7% in April, the fourth consecutive monthly increase in real spending.  The job market is tight, supporting consumer spending from gains in personal income, but the real cushion for consumers comes from excess savings accumulated during the pandemic. The savings rate in April fell to 4.4%, the lowest rate since 2008. But since the consumer is coming off of a period where monthly savings rates were 3 standard deviations above the norm, investors should look at the stock of savings and not just the rate of savings. Consumers stored up part of their income for a couple of years and built up a large stock of savings that is offsetting the historic inflation environment. “Overall, the consumer has solid footing to withstand tightening monetary conditions,” explained Jeffrey Roach, Chief Economist at LPL Financial.

Rebound In Credit Card Usage

In recent months, revolving consumer credit rebounded off the near term lows made in January 2021. So in addition to excess savings, consumers are turning to credit cards to fuel growth in real spending. Since the Great Financial Crisis (GFC), domestic consumers deleveraged and as of December 2021, the ratio of total household debt payments to disposable income is 9.3%, significantly lower than the all-time peak of 13.2% in 2007. The decade of deleveraging puts the consumer in a healthy spot for using credit to weather the current inflationary storm.

Inflation Rate Is Cooling But A Lot More To Go

The rate of growth in the core personal consumption expenditure (PCE) deflator in April declined to 4.2% year over year (YoY) from 5.2% YoY in the previous month.

Inflation dynamics are going in the right direction and should be welcomed news for Federal Reserve officials. The inflation rate for just durable goods has now declined for three consecutive months – falling to 8.4% in April from 11.5% in January. Not surprising, inflation rates in services are holding steady at 4.6% YoY.

The current economic environment allows the Federal Reserve to maintain focus on price stability and will likely hike by 50 basis points at the June meeting. See the Econ Market Minute v-log for more insights.

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