Fed analysis: Pandemic savings boom could be fueling inflation

A dramatic increase in the rate of personal savings during the COVID-19 pandemic—driven in part by federal stimulus—may have contributed to persistently high inflation amid constrained supply, according to an economic analysis published today by Federal Reserve staff. The authors estimated that U.S. households accumulated roughly $2.3 trillion in savings in 2020 and through the summer of 2021, far beyond what they would have saved if income and spending components had grown at pre-pandemic levels. They also concluded that since last year, households have decumulated about one-quarter of these excess savings, as the saving rate has dropped below its pre-pandemic trend.

The personal saving rate jumped from less than 10% in the years before the pandemic to a high of more than 26% in the second quarter of 2020, the authors estimated. Since the start of 2022, the rate has dipped below 5%. They also estimated that households in the lower half of income distribution were still holding about $350 billion in excess savings as of mid-2022—mostly stemming from the boost to income induced by fiscal stimulus in 2020 and 2021.

That excess savings has been used to pay down debt, to invest in equity and other financial assets or as a down payment for buying a home, instead of keeping them as liquid assets, thus shifting where the savings appear on balance sheets, according to the analysis. Regardless of how the money was spent, excess savings resulted in higher net wealth and stronger balance sheets for lower-income households, which have continued to support spending and credit performance.

Households in the top half of income distribution hold the vast majority of excess savings, at about $1.35 trillion as of mid-2022, the authors estimated. With that group able to travel and spend again, their excess savings are likely contributing to higher levels of spending, they said. Still, the report’s authors added that the recent demand by upper-income households likely has been boosted more by earlier gains in equity and housing prices than by their excess savings.