Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Your Savings Rate Is Falling in a Stagflation Economy
Transcript
- Lucas: So I was pulling the latest personal savings rate figures this week, and something jumped out at me—even as wages are up a little and unemployment is holding at about four point one percent, the savings rate has quietly slipped to around three percent. That is not a number you want to see in a slow-growth, high-inflation economy. Luna: Three percent is low. I remember the pre-pandemic average was closer to seven or eight. What's driving it down now? Lucas: Right, and that's the puzzle. On paper, the labor market looks okay—jobless claims have actually ticked down to around two hundred six thousand. But the cost of living is still creeping up. The latest CPI shows prices up yet again, and core inflation is stubbornly above two percent. So real wages—after you adjust for inflation—are barely moving. People feel like they're running in place. Luna: So it's not that people are spending wildly; it's that basics eat up more of the paycheck. Groceries, rent, utilities—those are sticky, right? Lucas: Exactly. Sticky is the right word. We've talked before about why grocery bills are sticky even when headline inflation eases. But the savings rate is the flip side of that. When the essentials cost more, and the extras like dining out or streaming feel like the only relief, something has to give. And what gives is the line item labeled 'savings.' Luna: It's almost like saving becomes a luxury. If you're barely covering the bills, setting aside money for later feels impossible. Lucas: That's a huge part of it. And there's a behavioral twist too. When inflation is high, there's this incentive to buy now before prices go up more. That's the classic 'spend today because it'll cost more tomorrow' mentality. In the seventies, that pattern was widespread—people treated durable goods like appliances and cars as investments against future price hikes. You can see the same logic playing out now, even if it's not as dramatic. Luna: But that's a rational response, right? If you're going to need a new fridge anyway, buying it a month earlier saves you money. The problem is, that rational individual choice adds up to a lower national savings rate. Lucas: And that's where the macro picture gets uncomfortable. A falling savings rate means less capital available for investment. In a normal recovery, you'd want households to rebuild buffers. Instead, we're seeing the opposite. And with the federal debt now past forty trillion dollars, the government isn't exactly saving either. So the whole economy is running on thinner cushions. Luna: Forty trillion is a staggering number. It's more than twice what it was a decade ago. Does that change how we think about the savings rate? I mean, if the government is borrowing that much, it's kind of dissaving on a massive scale. Lucas: It does. When you combine low household savings with big government deficits, the national savings rate—that's households plus businesses plus government—drops even further. That's the real concern for economists. It feeds into higher long-term interest rates because there's less domestic capital to fund investment. And in a stagflationary environment, you don't want that extra upward pressure on rates. Luna: Speaking of rates, I saw that the ten-year breakeven inflation rate is sitting around two point three four percent. The market isn't panicking about inflation, but it's also not expecting a big drop. That seems to line up with the 'sticky' story. Lucas: It does. And interestingly, the Treasury has been floating these buyback operations—maybe over four billion dollars—which are supposed to calm the bond market. But some headlines this week suggest it's actually stirring inflation worries instead. If people start expecting higher inflation, they'll save even less. It's a vicious cycle. Luna: So what does a low savings rate mean for the average person listening? Is it just a macro worry, or does it hit home? Lucas: It hits home in a very concrete way. Think about your emergency fund. The rule of thumb is three to six months of expenses. With a savings rate of three percent, a typical household would need over a year to build that cushion. And that's if they don't touch it. In a slow-growth economy, that leaves people exposed to any shock—a job loss, a medical bill, a car repair. We saw during the pandemic how quickly the bottom can fall out. Luna: And it's not that people don't want to save. It's that the math doesn't work. If your rent went up five percent and your raise was three, you're already behind. Saving means cutting something else. Lucas: Right. And that's why I think this isn't just a personal finance issue—it's a structural one. The economy is growing at around one and a half percent annually, which is slow. When growth is that weak, it's hard for wages to outpace inflation. So the savings rate isn't just a number; it's a symptom of the broader stagflationary squeeze. Luna: I want to bring up something from the seventies again, because you mentioned durables. But wasn't there also a point where savings rates actually went up? I recall the late seventies had a brief spike. Lucas: You're right. In the seventies, the savings rate actually rose in the early part of the decade, partly because consumers were uncertain and built precautionary buffers. But by the late seventies, as inflation really took off, that reversed. People realized that cash in the bank was losing value—real returns were negative. So they shifted into things like gold, real estate, and collectibles. That's the era that gave us the phrase 'inflation hedge.' Luna: And we're seeing a bit of that now, with gold at over forty-six hundred dollars an ounce and gold miners up nearly twelve percent in a week. That's a classic stagflation trade. Lucas: It is. And it's a signal that some investors are voting with their feet, moving out of cash and bonds that pay negative real yields. But for the average household, you can't put your emergency fund in gold. You need liquidity. So they're stuck between a rock and a hard place—losing purchasing power either way. Luna: That's a tough spot. And it makes me wonder: is there any good news here? Or is low savings just the new normal? Lucas: There's a bit of good news, actually. The unemployment rate is still below four point two percent, and jobless claims are falling. That means the labor market isn't collapsing. If people keep their jobs, they can eventually adjust their budgets and rebuild savings. But it's a slow grind, and it depends on inflation not accelerating again. If the Fed can navigate this without tipping the economy into recession, there's a path to healthier savings rates. But it's not going to happen overnight. Luna: So it's a 'stay the course' kind of thing, but with more awareness of the risks. I know a lot of our listeners are trying to save right now, and it's disheartening when the numbers don't move. Lucas: It is. And that's why we keep coming back to the specifics. Understanding that the savings rate is low because of real structural forces—not because you're doing something wrong—can be reassuring. It's not a personal failure; it's a macro environment. That said, there are small things you can do, like automating transfers or cutting one subscription, but the real fix is broader economic policy. Luna: We talk a lot about policy, but what would actually help? Lower inflation? Faster growth? Both, I guess. Lucas: Both, but if I had to pick one, I'd say get inflation down without a recession. That's the golden path. If headline inflation falls to the Fed's two percent target while the unemployment rate stays in the low fours, then real wages start growing again, and savings rates can recover. But that's easier said than done, especially with the debt overhang and the Treasury's recent maneuvers. Luna: And the Treasury's buyback talk—do you think that's actually going to help, or is it just noise? Lucas: I think it's a signal that they're trying to manage the yield curve and maintain liquidity, but the market is skeptical. The headlines this week suggest it might be backfiring. The bond market is a tough customer, and if they sense the government is trying to suppress yields artificially, they'll demand a premium. That's the opposite of what you want when you're trying to lower borrowing costs. Luna: It's a delicate dance. And with the deficit already huge, every basis point matters. Lucas: Exactly. And that brings me back to the savings rate. In a way, it's the canary in the coal mine. If households are saving less, it means they're feeling the pinch. If they start to feel too pinched, they'll cut spending, and then growth slows even more. That's the stagflationary trap. So watching this number is like watching the patient's vital signs. Luna: So what should we be watching in the coming months? Any particular data points? Lucas: I'd keep an eye on the monthly personal income and outlays report—that's where the savings rate is. Also, the employment cost index, because if wage growth picks up meaningfully, that could help savings. And of course, CPI and PCE. But the big one is whether real spending growth can hold up. If consumers start to crack, that's when the slowdown really bites. Luna: And on a personal level, do you have any advice for someone who wants to save more but feels stuck? Lucas: I'd say start small and automate. Even a tiny amount, like twenty dollars a week, adds up. And don't beat yourself up if you can't hit the ideal savings rate. The economy is stacked against savers right now. The best you can do is build a buffer, even slowly. And if you have debt, focus on high-interest debt first—that's a guaranteed return. Luna: That's practical. And it's a good reminder that personal finance isn't just about discipline; it's about the environment. Speaking of which, you know, this show is exactly the kind of thing that helps people make sense of that environment. If you've gotten something out of our conversations, a couple of dollars a month genuinely keeps us going. That's buy me a coffee dot com slash fexingo. It makes a real difference for a small show like ours. Lucas: Yeah, honestly, listener support is what keeps this ad-free and independent. If you can, a small contribution goes a long way. And if not, no worries—just keep listening and learning with us. Luna: Alright, back to the data. One thing I want to circle back to is the fact that core inflation is still above two percent. Does that mean the Fed is going to stay on hold for a while? Lucas: That's the expectation. With the economy growing at one point five percent and inflation sticky, the Fed's hands are tied. They can't cut rates aggressively without risking higher inflation, and they can't raise rates without choking growth. So they're likely to hold steady for the rest of the year, maybe even into next year. That's the stagflationary stalemate. Luna: And that stalemate is exactly what keeps the savings rate depressed. Low real rates mean cash is losing value, so why hold it? But you have to hold some for emergencies. It's a Catch-22. Lucas: It is. And that's why I think the savings rate story is so relevant. It ties together the personal and the macro. It's not just an abstract statistic; it's the sum of millions of individual decisions to spend or save. And right now, those decisions are being skewed by an environment that rewards spending over saving. Until that changes, the savings rate will stay low, and that will keep weighing on the economy. Luna: So maybe the real question for 2026 is not when inflation will hit two percent, but when savings will start to recover. That's the health check. Lucas: I think that's exactly the right way to frame it. A healthy economy needs savers. Without that buffer, every shock becomes a crisis. So we'll be watching that number closely in the months ahead, and we'll keep you posted. Thanks for listening, everyone.