During the quiet days of the COVID-19 lockdown, American households, in an unexpected turn, piled up a mountain of extra cash, reaching a staggering $2 trillion.
But now, there's a twist in the tale that's as surprising as it was unforeseen. This financial cushion that seemed like a safe harbor during the pandemic storm is evaporating faster than anyone predicted.
Where did all that money go, and what does this mean for families grappling with ongoing high inflation?
Savings Cushion Almost Depleted
According to new research from the Federal Reserve Bank of San Francisco, U.S. households held less than $190 billion in excess pandemic savings as of June 2022, down drastically from over $2 trillion ¹ in August 2021. The researchers estimate these remaining funds will dry up completely by the end of first quarter of 2023.
This is a worrying sign for family finances. The excess savings provided a buffer against rising prices over the past year. But with that cushion vanishing, many households have little protection left against further inflationary shocks.
Surging costs for essentials like food, rent, and gas are largely to blame for the savings drawdown. Compared to pre-pandemic levels, grocery prices are up 13.5%, rents have spiked 26%, and gas remains 40% higher despite recent declines.
Fed: Savings Fueled Spending Boom
According to the Federal Reserve, excess savings helped fuel a consumer spending boom in 2022 even as interest rates rose. This spending boost was a key factor behind the economy's surprising resilience so far this year.
But Fed officials warned at their July meeting that this dynamic is fading. Tighter financial conditions and declining savings appear to be slowing spending already.
Other data backs this up. After blowout growth in the first half of 2022, credit card spending and retail sales have softened in recent months.
If consumers pull back further as savings evaporate, it could mean a sharper economic slowdown.
Younger, Lower-Income Households Most Affected
While all groups ramped up savings during COVID lockdowns, some stand to lose more than others.
Millennials in their peak earning years stashed away nearly $5,000 more on average than prior generations. But this age group also faces huge expenses from student debt, child care, and housing.
Similarly, lower-income households were able to save far more than usual, but have since drawn heavily on those funds just to afford the basics. Further inflation or job losses could be devastating for these vulnerable groups.
With emergency savings depleted, many families have no margin for error in the months ahead.
Cutting back and shoring up finances needs to become a priority for most. Otherwise, experts warn tough decisions like debt delinquency or foreclosure may become unavoidable for some.
Video of a Man Stating Many Could be Out of Money by January 1st
Here is a video by creator Graham Stephan where he shares his thoughts and more details.