Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Quietly Reshaping Personal Savings Behavior
Transcript
- Lucas: So here's a puzzle we don't talk about enough. Inflation is still running hot — CPI hit 332.4 in April, up another two points. Consumer sentiment just set a fresh record low last week. And yet, the personal savings rate in the U.S. has actually been creeping up, month over month. Luna: Wait — people are saving more while complaining more about prices? That sounds contradictory on its face. Lucas: Exactly. But the data doesn't lie. The savings rate as of March was 4.8 percent. That's still low by historical standards — we were above 7 percent in the 2010s. But it's a meaningful climb from the trough of 2.3 percent we hit back in mid-2022, when inflation was peaking and everyone had to spend just to keep up with rent and groceries. Luna: So what changed? Are people finally getting some breathing room from wage growth? Lucas: Partly. Average hourly earnings in the private sector hit $37.40 in April, up about 4.3 percent year-over-year. But inflation is still running around 3 to 3.5 percent on core measures, so real wage gains are modest — not enough to explain a doubling of the savings rate. Luna: Then what's driving it? Fear? Lucas: I think that's a big part of it. Look at the JOLTS data we got for March — job openings fell to 6.866 million, down from 6.922 million the month before. Two years ago, openings were above 12 million. The labor market is still adding jobs — nonfarm payrolls rose again in April — but the vibe has shifted. Workers are less confident they can walk out and get a new job in two weeks. Luna: So precautionary savings — people building a buffer because they sense the ground is shaky. Lucas: That's the channel. And there's a second force: higher interest rates are finally making saving actually worthwhile. You can get 5.2 percent annual percentage yield on a high-yield savings account from an online bank right now. That's real return, even after inflation. Compare that to 2021 when savings accounts paid 0.1 percent and your cash was melting. Luna: But there's a tension there, right? If everyone saves more, that reduces consumption, which slows the economy further — that's the stagflation double bind. The Fed wants inflation down but doesn't want to tip us into recession. Lucas: Exactly. And here's the twist — not everyone is saving. The aggregate rate hides a lot. Higher-income households are the ones piling up cash. Lower-income households? Credit card delinquencies have been rising for six straight quarters. The New York Fed's data shows serious distress in the bottom quartile. So you've got a two-tier consumer: the top tier is saving because they can, the bottom tier is saving because they have to, and many simply can't. Luna: So the savings rate goes up, but for different reasons — one group is being prudent, the other is being squeezed. Lucas: Right. And that's actually pretty similar to what happened in the 1970s. During the worst stagflation period, from 1973 to 1975, the personal savings rate actually rose from around 8 percent to over 10 percent. People were terrified of another oil shock, of losing their jobs — unemployment hit 9 percent. So they hoarded cash even as inflation ate into their purchasing power. Luna: We're not at 9 percent unemployment yet — we're at 4.3. But the psychology might be shifting faster than the numbers. Lucas: That's the interesting thing about this episode. Consumer sentiment hit a record low last week. People feel poorer. They're seeing headlines about the Iran war rattling energy markets, about trade deals that might not pan out, about AI rewriting the economy. The uncertainty is real, and it's showing up in behavior before it shows up in GDP. Luna: And real GDP growth annualized came in at 2.0 percent for the first quarter — down from 0.5 percent the quarter before, actually that's an improvement. So the economy isn't collapsing. But the vibes are terrible. Lucas: Exactly. And that's why this savings story matters. If people keep saving at a higher rate, it acts as a drag on demand, which helps the Fed cool inflation without having to raise rates more. But it also means the consumer — two-thirds of the economy — is tapping the brakes voluntarily. Luna: Is there any sign that this is starting to show up in retail sales or services spending? Lucas: We saw retail sales soften in March, especially in discretionary categories like furniture and electronics. And the services side — travel, dining — still holding up but growth is decelerating. The data is consistent with a consumer who is spending, but more carefully, and putting a little aside each month just in case. Luna: If walking through the economy with us has made something click, the way these episodes stay ad-free is listener support. It's a small thing — buy me a coffee dot com slash fexingo. And honestly, it keeps us going without having to sell you anything. Lucas: Yeah, that's right. We don't run ads, and that's a choice. The coffee donations really do make a difference. So if today was useful, consider it. And we'll keep digging into the data. Luna: So back to the savings puzzle — what does this mean for the Fed's next move? They meet again in June. Lucas: I think the Fed is watching the same data we are. They see savings rising, they see job openings falling, they see inflation still sticky but not accelerating. The ten-year breakeven inflation rate is at 2.4 percent, basically anchored. That gives them room to hold steady. But if the savings rate jumps past 5 percent, that's a signal that demand is cracking, and they might actually start talking about rate cuts sooner than expected. Luna: So higher savings could paradoxically be the thing that breaks inflation's back — but also brings the recession everyone fears. Lucas: That's the stagflation tightrope. Too much saving, and growth stalls. Too little, and inflation stays hot. The sweet spot is a modest savings rate that lets consumers build buffers without cratering demand. Right now, we're in that zone — but it's fragile. Luna: One thing I keep coming back to: the regional banking sector has been offering those high-yield savings accounts to attract deposits. Is that part of the story too? Lucas: Absolutely. After the regional banking turmoil in 2023, banks are desperate for deposits. They're offering 5 percent plus to bring money in. That's pulling cash out of money market funds and into insured accounts. And that's actually a positive — it strengthens bank balance sheets. But it also means banks are paying more for funding, which squeezes their net interest margins. So you've got this feedback loop: higher rates attract savings, but they also pressure bank profitability. Luna: And if banks get squeezed, they lend less — which slows the economy further. Lucas: Right. So the savings story isn't just about households. It's the entire financial system adapting to a higher-rate, lower-growth environment. And I think that's the real 1970s echo — not the exact same numbers, but the same sense of institutions and individuals all adjusting to a new normal that nobody asked for. Luna: So what should our listeners watch for in the next few months? Lucas: Two things. First, the May personal income and outlays report, due out next week — that'll give us the savings rate for April. If it ticks above 5 percent, that's a signal. Second, watch the JOLTS data for April — if job openings drop below 6.5 million, that's a bigger concern. The labor market is the foundation of consumer confidence. If it cracks, the savings rate could spike as people brace for layoffs. Luna: And those initial jobless claims — they were 209,000 last week, still low. But it's a leading indicator. Lucas: Exactly. 209,000 is fine. But if we see a sustained move above 250,000, that's when the precautionary saving really kicks in. So we'll be watching. Luna: Alright, a puzzle with real stakes. Thanks for walking through it with us. Lucas: Thanks, Luna. And thanks to everyone listening. We'll be back with another angle soon.