Shiller price index

US consumers soured by inflation despite pandemic financial cushion: Kemp

LONDON — American households are in a more comfortable financial position than before the pandemic, but soaring inflation has started to erode those gains, sparking feelings of insecurity and anger over rising prices.

Households and nonprofits had liquid assets worth $18.5 trillion at the end of March 2022, up from $14.3 trillion at the end of March 2019, after adjusting for inflation, according to Federal Reserve data.

Liquid assets include currency as well as balances in checking accounts, term deposit accounts, and money market funds, all of which are readily available to be spent (“Flow of funds accounts of the United States,” June 9) .

Liquid assets have been building up at a record pace in 2020 and 2021 due to pandemic-imposed restrictions on travel and social spending as well as stimulus payments made by the federal government.

During the most intense periods of confinement in the second quarter of 2020 and the first quarter of 2021, households were saving at annualized rates of 4 to 5 trillion dollars.

More recently, however, the inflation-adjusted value of liquid assets has held steady or declined as households have been able to travel and socialize again, while rising prices have reduced the real value of sales.

In real terms, liquid assets at the end of Q1 2022 were down slightly from $18.7 trillion at the end of Q1 2021.

Real balances are expected to fall much more sharply since then as most of the remaining travel restrictions were lifted as inflation rose.

The fact that real household cash is high but rapidly shrinking explains why current spending remains strong, but consumers and voters say inflation is their main concern and the economy is on the wrong track.

The resilience of consumer spending in the face of rapidly escalating food, energy and other bills will depend on whether households focus on the level of their real cash (high) or the rate of change (rapidly falling ).

It also depends on how long rapid inflation is expected to persist and continue to erode the value of their existing savings and their ability to add to them.


Consumers expect prices to rise at annualized rates of 5.2% over the next year and 2.8% over the next five years, both much faster than the target for the central bank (“Consumer Survey”, University of Michigan, July 15).

The proportion of households reporting being better off financially than a year earlier fell to 37% in May 2022 from 42% in May 2021, while the proportion reporting being worse off jumped to 46% from 22%.

Among respondents who said they were worse off, the most commonly cited reason was higher prices (38%) and this was true for those in the bottom third of the income distribution (39%) as well as in the top third (33%).

More respondents said higher prices made them worse off (38%) than higher incomes made them more prosperous (34%).

For respondents in the bottom third of the income distribution, the gap was even wider, with significantly more respondents citing higher prices to make them worse (39%) than citing higher incomes to make them better ( 25%).

Reflecting the impact of inflation, the consumer sentiment index fell to an all-time low in June (50.0), worse than during the 2008 financial crisis (55.3), the recession of 1980 (51.7) or the consequences of the oil shock of 1975 (57.6).

There was only a slight improvement in the first part of July, with preliminary results showing the sentiment index rising slightly to 51.1.


Households still have the financial resources to continue spending for the next year or more as they deplete the savings they have accumulated during the pandemic.

But this is an aggregate and it is likely that many households in the lower part of the income distribution are already depleting their reserves and becoming compelled to spend.

Crucially, the household and business narratives and psychology around spending already show many of the traits associated with the onset of a recession (“Narrative economics”, Shiller, 2017).

There are already stories based on anecdotes of households opting for cheaper brands, limiting weekly spending on food and gasoline and postponing non-essential expenses.

Companies in many industries have begun cutting hiring, considering downsizing and suspending capital investment.

To persuade households to continue spending, they must be convinced that growth will continue and that inflation will be brought under control to stem the erosion of their financial situation.

The depletion of savings is psychologically unpleasant when it is associated with rising prices and costs rather than increased consumption, which explains the bad mood noted in the surveys.

Households are already starting to push back; they may not be able to do much about rising prices as consumers, but as voters they can punish those they hold responsible.

John Kemp is a market analyst at Reuters. Opinions expressed are his own.

(Editing by Barbara Lewis)