Gradually, Americans' savings rate starts to rise

The personal savings rate is the percentage of one's after-tax disposable income that is saved rather than spent. Tracked by the U.S. Federal Reserve, America's collective savings rate currently stands at just 4.6%. This means that, on average, Americans are saving only $4.60 on every $100 they earn after paying taxes. Since 1959, the historical average is around 8.8%.

The personal savings rate has a long way to go before reaching its historical benchmark of 8.8%. However, it has been gradually rising over the past 11 months. In June 2022, the personal savings rate reached a post-pandemic low of just 2.7%. By January 2023, it had ebbed higher to 4%. For you economic history buffs, the all-time record low is 2.1% reported back in July 2005.

Not surprisingly, the all-time high is 33.8%, set back in April 2020. At the start of the pandemic, government-imposed COVID mandates shut down entire sections of the U.S. economy. These actions severely restricted consumers' ability to spend their money. For the most part, Americans were stuck at home. Consequently, savings accounts quickly ballooned.

As the economy reopened, Americans were quick to resume their spending and savings accounts started to decline. This decline was further fueled by inflation. The national inflation rate surged from 1.7% in February 2021 to a 40year high of 8.9% in June 2022. Rising prices forced millions of Americans to pull money from their savings and retirement accounts, as well as to take on additional credit card debt, to pay for their living expenses. For 25 consecutive months, the pace of inflation (rising prices) exceeded the pace of rising employee wages.

Despite the gradual rise in the personal savings rate, further gains are still being hindered by high consumer prices, especially among basic necessities. Though inflation has declined to 4%, prices on many basic necessities continue to rise at a very brisk pace. Over the past 12 months, food prices have risen another 6.7% while the cost of shelter has increased by 8%.

The ability to save is also heavily influenced by income levels. Historically, inflation tends to hit low-income, retirees and those on fixed-income the hardest. However, this current inflationary cycle has quickly expanded to many middle-class households. In a recent survey by Forbes, 81% of Americans earning $150,000 or more were able to save more money over the past 12 months. Conversely, just 41% of those earning less than $30,000 were able to save more. Within this group, survey respondents cited inflation as the top reason they were unable to save extra money.

Most Wall Street economists argue the worst of inflation is likely behind us. That said, inflation is likely to remain historically high – above 2% – for an extended period of time. But the personal savings rate is finally heading in the right direction. And that's a good thing. For millions of Americans, it's their savings accounts that provide them a level of security and act as a source of emergency funds.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, davenport.

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