US Savings Rate Drops Below Pre-Pandemic Levels as Inflation Hits Households Hard
The U.S. savings rate has dropped below pre-pandemic levels and Americans are burning through the extra savings they accumulated during the pandemic. According to Goldman Sachs, as reported by the Wall Street Journal, by mid-January 2022, U.S. citizens had already spent down 35% of their extra savings and this number is expected to jump to 65% by the end of 2023.
This is largely due to the high inflation that has hit many households hard. Consumer prices rose 6.5% over the year-long period ending in December, which is more than triple the Federal Reserve’s target inflation rate of 2%. This has caused people to dip into their savings accounts to cover the cost of everyday necessities, and some households have already exhausted their savings.
For instance, Karissa Warren, a kitchen manager who lost her job in December, and her husband accumulated over $10,000 in credit card debt during previous financial rough patches. In addition, their costs such as meals for their 3-year-old daughter have gone up due to inflation, and the interest rate on the couple’s credit card has doubled to 10%. Paula Green, a 60-year-old gig worker raising her 14-year-old granddaughter, has also accumulated $4,500 in credit card debt after spending thousands on her daughter’s wedding.
Despite the high inflation, consumer spending data from Bank of America and Citigroup still shows strong consumer spending, with consumer spending up 10% in 2022 compared to the year before. Credit card giant Mastercard and rival Visa also reported higher-than-expected, fourth-quarter earnings, citing solid consumer spending.
However, the consumer spending is not enough to cover the rising costs, leaving many Americans in debt. The Federal Reserve has been raising rates aggressively over the past year, which has directly affected credit card rates, leading to a persistent cycle of debt.
In order to break this cycle, people like Warren and Green are taking on new jobs that pay more than their previous ones in order to pay off their debts. However, it’s still uncertain how much tightening it will take to slow down the economy and bring down inflation.
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