American and European Covid-19 Savings: The Dark Horse to Push Inflation Higher

According to data from major banks, Americans and Europeans have put more money in savings during the Covid-19 pandemic, which could lead to a boom in consumer spending once new cases appear to subside enough. Wall Street observers are following this factor closely as the two continents are beginning to see economic growth again.

U.S. savings now account for 10% of GDP, while UK and EU savings account for 7% and 6% of GDP, respectively. As the American and European economies open up and consumers resume “normal” life, these savings could significantly boost consumer spending, creating an economic boom.

A research briefing from Oxford Economics published last week predicts that American households will begin to spend their savings this summer, estimating a 9.6% jump in consumer spending this year, the most robust performance since 1946. The Federal Reserve does not seem at all worried about this, even though such a dramatic jump in spending is certian to turn inflation numbers red-hot. If the Fed fails to properly account for the effect of a consumer spending boom, there could be trouble ahead.

Meanwhile, a survey from Deutsche Bank (DB) by strategist Luke Templeman last week finds that priority spending for disposable income among both American and European consumers are experience-based items, like overseas traveling, domestic holidays and restaurants and cafes. The second priority spending is mainly goods like clothing and footwear, electronics and vehicles.

The survey further finds a considerable divergence occurs in regards to when consumers will spend their savings. For example, amongst those who have delayed purchasing a luxury item during the Covid-19 pandemic, 42% of Germans say they will not buy it in the foreseeable future. That isn’t the case with Britons; only 20% say the same thing.

The sharp increase in consumer spending that will follow the pandemic has also caused worries among some companies that think they may run out of stock. “There has been a 50 percent increase in mentions of “supply chain disruptions” incorporate documents since the covid outbreak,” says the DB report, meaning that the consumer boom will have a greater benefit for companies with the right inventory strategies, stronger supply chain relationships and better balance sheets.

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I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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