$877 Billion in Checks Won’t Automatically Fuel Inflation

Never underestimate the seemingly endless appetite of U.S. consumers, who now have a huge stockpile of cash at their disposal. Or so goes the theory, increasingly popular among economists and money managers, that has fueled some predictions of resurgent inflation.

But new research calls into question just how big this cash cushion is relative to households’ obligations and how much Americans are truly willing to spend.

The headline numbers seem huge: Americans have $1.8 trillion in extra savings over the pre-pandemic total, according to the latest estimates by Bloomberg Economics based on data through February. A lot of this stems from about $877 billion of checks sent to U.S. households in three rounds of stimulus payments during the pandemic, which has helped consumers pay down debt and save.

The question, though, is how much of that they can truly deploy in the coming months. While March retail sales surged 9.8%, the most in 10 months, according to data released on Thursday, the jump comes on the heels of stimulus checks that spurred shopping sprees. For example, total card spending in the week ended March 27 was up 40% for Americans who had just received stimulus checks compared with a 10% gain for nonrecipients, according to a Bank of America Corp. report this month.

What happens months down the line is less clear, and the signal from bond markets is that the cash pile isn’t enough to unleash animal spirits over the long term. Treasury yields dipped Thursday after what was, for the most part, an exceptional retail sales report. This underscores how unique this moment is not only in the scope of savings in bank accounts but also the continuing health crisis and its effect on both the labor market and supply chains.

When downturns are led by the services sector, as this one has, recoveries tend to be slower because it’s hard to stock up on experiences you missed. After all, how many more times can someone go out to eat or get a haircut or stay in a hotel than they would have before the pandemic?

This is especially true as many hotels, airlines and car rental companies struggle to hire enough people to meet the surging demand, leading to canceled flights and fewer cars available.

Then, of course, there’s a question of debt. Lower-income individuals tend to spend money faster and use more of it to pay down debt, Federal Reserve research shows. Jared Bernstein, one of President Joe Biden’s economic advisers, noted earlier this year that some of the cash will go toward paying down deferred rent and mortgage payments. Meanwhile, the volume of student loans outstanding has risen to an all-time high of $1.6 trillion as of the end of 2020.

On average, American households set aside about 26% of their stimulus checks to buy things in the relatively near future, with most of the funds going toward savings and debt payments, according to an April 7 New York Fed research report.

While this is great for their balance sheets and financial stability, it isn’t particularly inflationary. The biggest U.S. banks uniformly talked about tepid loan demand in their first-quarter reports, with consumers paying down credit card bills and refraining from much further borrowing. 

Once the boom of revenge shopping and postponed vacations is over, it’s likely there will still be plenty of cash sloshing around checking accounts or put toward buying stocks and bonds. Wealthier people’s closets are full and their garages are packed. Lower-income households are still facing issues of job insecurity and sluggish wage gains, and it’s unclear if they’ll take on more debt without a much more robust labor market.

This gives credence to the market pricing of inflation, which shows an acceleration in near-term price increases and then a longer-term slowdown as the economy settles down into its more familiar, humdrum rhythm. Helicopter money succeeded in plugging a gap in lost business from the pandemic, but it’s harder to see how it alone could lead to a sustained period of surging prices and an extraordinarily hot economy.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

©2021 Bloomberg L.P.

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