The impact of excess household savings on inflation dynamics in the EU during the COVID-19 era

This study uses panel models to examine the effects of excess household savings on inflation across fifteen EU countries from 2020 to 2023. Excess savings are defined as the additional savings accumulated by households due to pandemic-related government restrictions that limited mobility and reduced infection risks. We employ various panel model specifications to assess how changes in these excess savings influenced inflation. Our findings consistently show a statistically significant negative impact of excess household savings on inflation. The shift from accumulation to depletion of excess savings contributed 1.3 percentage points to inflation between 2020 and 2021. Further depletion of excess savings boosted inflation by additional 0.4 percentage points in 2022, on average. This study adds to the understanding of the sharp rise in global inflation post-COVID-19, identifying changes in excess household savings as a contributing factor, alongside expansionary fiscal and monetary policies, supply chain disruptions, and shifts in consumer demand from services to goods. Our findings suggest that swings in excess savings can significantly influence price dynamics. Given their potentially substantial effects on future inflation, excess savings should be considered a forward-looking indicator and an important part of the early warning systems central banks use to detect rising inflationary pressures from major non-economic shocks, such as wars, natural disasters, or pandemics.