Saved inflation Consumers have saved more than $5 trillion in extra money since the start of the Corona crisis, money that will probably be spent in part when the economy reopens. That 5 trillion represents more than 6 percent of world GDP, roughly equivalent to the GDP of Japan, the world’s third-largest economy. Above all, the American consumer has saved more. That’s pretty unique, because the American consumer normally spends what comes in. But with so much money from the government, that was also relatively easy. Those who found themselves without a job a year ago in the United States were well helped by the federal government. On average, the income of an unemployed person over the past 12 months has been $30,000, and for three-quarters of the unemployed, this is more than they normally earned when they still had one or more jobs. The restrictive measures also make it more difficult to spend all that money.
Part of the 5 trillion has gone to the financial markets. That is not so strange, because a savings account does not yield that much anymore. Furthermore, many people suddenly have much more free time as a result of the restrictive measures. These restrictive measures also meant that there was less opportunity to gamble. Casinos closed, horse races were canceled, but fortunately, financial markets were open. And for those who felt the need to continue trading at the weekend, there were always the crypto-currencies. There is a risk that consumers will soon drain their investment accounts rather than their savings. In this respect, it is a good thing that the savings are not evenly distributed. Two-thirds of the additional savings are in the hands of the richest 40 percent of the population. These are not the people who consume their entire income anyway. Surveys show that a large part of the extra savings goes into paying off debts, the stock market, or as a little extra for retirement.
The extra money in the stock market has created asset inflation. Fortunately, this is not part of the inflation basket, otherwise, the central bank would have raised interest rates a long time ago. Official inflation fell sharply a year ago and that is one of the reasons why price inflation will be higher in the coming months. Inflation simply measures the increase in prices compared to a year ago. So on top of this ‘base effect’, we get the extra spending by consumers as the restrictive measures are relaxed. Disneyland will reopen on 30 April. In addition, a lot of money continues to come from central banks and various governments. In the business sector, stocks are low. Entrepreneurs were surprised by the rapid arrival of vaccines. And then there are some disruptions in production chains, partly due to a now chronic shortage of chips. In this light, it is not surprising that inflation expectations are rising. Nevertheless, most investors trust that the Powell-Yellen duo will be proved right: Rising inflation is a temporary phenomenon and there is no reason to expect higher inflation in the long term. As a result, the curve of inflation expectations is also inverted, a unique situation.
We are in the first phase of a strong economic recovery. In addition to low inventories and supply problems, there is also a growing shortage of labour. Unemployment has fallen from a peak of 15 percent in the United States to 6 percent now. Many unemployed people who are currently sitting at home have no incentive to go back to work until September. For the time being, they are still receiving generous compensation for staying at home. There is therefore a risk of underestimating the trend in inflation. That may be a temporarily higher level of inflation. In politics, temporary measures are remarkably often permanent. Many investors have a tendency to extend the present into the future. Now they may think that inflation is not that bad, but when they are in the middle of it, it feels different.