American Households Burn Through Pandemic Savings, Lose Spending Power Amid High Inflation

FILE - In this April 3, 2019, file photo a tip box is filled with U.S. currency in New York. Deciding how to prioritize different savings goals can be overwhelming, but financial experts recommend ordering them by urgency. Most people need an emergency fund first, followed by other goals such as saving enough for retirement, buying a home, traveling, saving for college and paying off debt. (AP Photo/Mark Lennihan, File)

The savings cushion that many Americans built up during the COVID-19 pandemic is dwindling as people struggle with elevated decades-high inflation, with the overall savings rate dropping below pre-pandemic levels, to its lowest in almost 15 years.

In January 2020, the personal saving rate of American citizens was 9.1 percent, according to data from the Federal Reserve Bank of St. Louis. This spiked to 33.8 percent in April 2020 during the COVID-19 breakout. It declined to 13.8 percent by year-end, only to jump to 26.3 percent in March 2021. But since then, it has largely been a one-way decline with no major increase.

By December 2022, the personal saving rate was only at 3.4 percent, which is considerably lower than the 9.1 percent savings rate in January 2020. The last time the personal savings rate was lower than it was in April 2008.

By the end of 2021, American households had accumulated an extra $2.7 trillion in savings, according to Moody’s Analytics. The savings build-up was due to a combination of reduced spending and pandemic stimulus from the government. But this amount is rapidly being depleted.

By mid-January 2022, U.S. citizens burned through 35 percent of the extra savings they had amassed during the pandemic, according to an estimate by Goldman Sachs. The firm expects this number to jump to an alarming 65 percent by the end of 2023.

Inflation and Savings
Inflation is cited as a major reason for the depletion of savings. After the pandemic relief measures began to unwind, prices began to soar, which forced people to dip into their savings.

“At the exact same moment you lost the government transfer payments, you got hit with very high inflation, which made your real spending power lower,” said David Mericle, Goldman Sachs’s chief U.S. economist, according to The Wall Street Journal.

In January 2020, the 12-month Consumer Price Index (CPI), a measure of annual inflation, was only at 2.5 percent. This fell to 0.1 percent in May 2020 and then went on an upsurge. Though inflation peaked at 9.1 percent in June 2022, it still remained at an elevated level of 6.5 percent as of December 2022.

Americans in the lower-income group are said to be the most affected by depleting savings. An analysis by the Bank of America showed that among its customers with a household income of less than $50,000 per year, the median balance in both savings and checking accounts had peaked in April 2021.

By November 2022, the median balance had fallen 36 percent among this demographic. Among households making $100,000–150,000 a year, this decline was only at 14 percent.

2023 Situation, Retirement Withdrawals
The Federal Reserve has been trying to cool down the economy in its attempt to control inflation. As part of this, it has raised interest rates multiple times. This made borrowing much more expensive, which is expected to eventually make people spend less, resulting in price growth slowing down.

However, a cooling down of the economy could lead to businesses starting to hire fewer workers and laying off existing employees, resulting in an upsurge in unemployment. This can lead to lower spending and a further reduction in savings.

Plus, some Americans might get nervous about job security and decide to reduce spending, which can boost the savings rate of such individuals.

Meanwhile, the high inflation rate has not only resulted in a dip in bank savings but also forced many Americans to remove funds from their retirement plans.

“A record 2.8 percent of the five million people in 401(k) plans run by Vanguard tapped their retirement savings in 2022 to cope with hardships such as medical bills, eviction, or foreclosure. That is up from 2.1 percent in 2021 and a pre-pandemic average of about 2 percent,” Fiona Greig, global head of investor research and policy at Vanguard, said in a LinkedIn post on Feb. 3.

A similar rise in withdrawals from 401(k) accounts was also seen among the users of the federal government’s Thrift Savings Plan as well as customers of financial services firm Fidelity.

source: the epoc times