How Inflation Impacts Your Savings: Expert Tips

In this video interview, Prof. Miller provides an explanation of the inflation rate, how and why it has changed since the pandemic, why gas prices rise, and what can consumers do to protect their money.

• Introduction
• The current situation of US economy
• How to protect savings at times of inflation

Introduction

Prof. Miller: I started as an engineer. I graduated from Purdue with a degree in engineering and sciences engineering. And I got involved in econ when I was an undergrad and went to grad school at SUNY Buffalo. I spent 31 years in my first job at Yukon on the East Coast, in Connecticut. That's the University of Connecticut. And I retired from there after 31 years and came to Las Vegas. I've now been here 21 years. Who would've thought that I'd do that and still going?

What Is the Situation of the US Economy Today?

Michael: What's your view on the state of the US economy today?

Prof. Miller: Well, let me just start by saying that one of the factors that people are concerned about now is inflation.

How the inflation rate is changing?

Prof. Miller: We saw that the Fed took the first step, or in fact, the FOMC took the first step for increasing interest rates at their meeting this week, up by 25 basis points.

And the FOMC stands for the Federal Open Market Committee, it's the group at the Fed that determines interest rate policy. It includes the seven members of the Board of Governors. Although there are some vacancies at the moment, plus five presidents of Federal Reserve Banks.

We have 12 Federal Reserve Banks in the United States and five of the presidents serve on a rotating basis. And the New York Fed president, since that's the location of open market operations, is always on that FOMC. But all the presidents show up, they're not going to miss that meeting. So that seems to be number one.

The current inflation rate in the US

Prof. Miller: The problem right now is inflation. If we go back to the pandemic, the Fed and the FOMC had a heck of a time trying to generate their target inflation rate, which is 2%. So I don't know, I've talked to many reporters recently within the last month or so, and I always make the following statement, which is people don't remember, or they conveniently forget that for 20 years, we've had pretty low inflation. And we've popped inflation up as now, about 8% on the CPI and you choose your different measures of inflation, you have different rates.

But I was just checking now in 1980, the CPI inflation rate was 14.5%.

Michael: What you're saying is Fed is on top of it. Yes, we have inflation, but it's not as dramatic as it used to be in the '80s. And there are people around that still remember the '80s.

Prof. Miller: Yeah. But everybody's younger. See they didn't live through that and this is their first shock of inflation for many people. And if you go to the gas pump and you see what happened to the price, you say, "Oh my God." Or if you go to the grocery store and you look at the price of meat, say, "Oh my goodness, what's going on here? Who's in control of this?" Well, the markets are in control of it to a large extent. The Fed tries to control it on the side by controlling interest rates. So I understand the concern. And for some people, it is a problem because they're living on the margin.

Economics is about looking at margins and there are people living on the margin that don't have a lot of income.

With an increase in the price of gasoline when they have to drive their car to get to work, to turn the money, to buy the food, and the food prices go up, some people are in pretty dire straits.

How to Protect Savings at the Times of Inflation?

Michael: What would you recommend for people that have a little bit of savings? What can they do to protect their money at times of inflation?

Prof. Miller: If you look at the savings rate, personal savings rate, that's the household sector in the United States. So this is the average across all households. The savings rate between 1959 and February 2020, has averaged about 8%. So that's a long timeframe up till the peak just before the pandemic hit.

How has the savings rate changed since the pandemic?

Prof. Miller: When the pandemic hit through so from March 2020 through March 2021, just 13 months, the savings rate was 18%. So people are not stupid. They saw that this is a big event. This is something we haven't seen before. People were thrown out of work and employment fell dramatically.

Here in Las Vegas, we lost like 240,000 jobs in two months. I mean, that's a dramatic change and people are observing that. And the government steps in now, certainly, in this case, there was somewhat bipartisan support for providing some relief to households, many sorts of government programs that were instituted.

How has unemployment impacted savings and consumer decisions?

Prof. Miller: I'm going to focus on one. And that was the extra unemployment compensation. The initial package was $600 a week. So think about that. If you worked 40 hours a week, you're getting $600 from the government on top of unemployment, if you're out of work, that's $15 an hour just for not working. So it's not surprising. People said, "We're getting this money coming in. We better not spend it. We better save some, but we may need it because this looks like it could be a long-term event.

The supply chain was seriously affected by all the events going on in a four or month period. I mean, looking back with 2020 hindsight, but did I know this ahead of time? Well, I don't know if I was smart enough, but looking back, I can see that the pandemic event caused the supply chain problems. And it also gave people who were out of work, laid off, or on furlough with the government money coming in.

They said to themselves, "Hey, I don't need to take the first job that comes along. Let me think about my career. Do I want to go back to work in the casino? Maybe not. Maybe I want to work somewhere else."

So out here, Amazon or warehousing out here, there's a structural shift in the labor market that is underway still going on, but it was underway. And that's why people were having difficulty. The employers were having difficulty finding workers.

Tips for protecting your savings today

Prof. Miller: Now, you said, "What should people do to protect themselves?" So the first thing that comes to mind is...

…don't make a big decision. So try to economize on your food and spending. 

So probably don't eat out as much. Of course, the pandemic caused us not... I guess we didn't eat out. We ordered out, picked up, and ate in, but we still ordered out. In order to keep the restaurants going, you put in a tip, right? For your pickup.

Eat more at home, and be more selective in your food. Energy consumption, you may need to think twice about just driving around.

But on the other hand, the price of crude oil went up to 125, 126. I saw this morning, it was up 7, so now it's just over 100. It came down by about 30 points, 25 points. And the rule of thumb that I've heard is that…

…a $10 increase in the barrel of oil is about a 30-cent increase in the gallon of gasoline with a little bit of delay. 

So if this 125 down to 100, if it goes down anymore, people might expect prices to go down to the pump. Oh my God, can you believe that? Would that happen? Well, the market may dictate that will happen, but I'm not predicting that yet. It's still too early.

When I was a kid, say 11 or 12, so I actually went back to 1958 January. My mother would give me a quarter on Saturday and I would go to the movies in the morning, not in the afternoon, or evening, it was in the morning. And they had a double feature cowboy movies like Gene Autry or Hopalong Cassidy, you probably don't know those names. You see two movies, you'd see a newsreel, you'd see a short and couple of cartoons, you got popcorn in Minnesota, for a quarter. So if I tell that to, in my students today, they go, "My goodness. Oh, wow. Wow. Wow."

So I went back and I got the CPI from 1958 through today. I took my quarter and I look at how much would that be today at today's prices? It's $2.50, 10 times higher. Now you can't do that as the movies these days. I don't know if you can get popcorn for 2.50? But inflation has a way we tend to forget.

Michael: Thank you very much, thank you for your time.

So how do you challenge inflation? Please share your comments and tips below.

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