Thursday, September 24, 2009

Forecasting Future Savings Rate

As domestic dis-inflation, deflation expectations, and a rallying dollar took hold during 2008 the savings rate made a predictable jump. Determining what's the cause and what's the effect can be problematic, but we can look at the PCE price deflator to determine where future savings rate may go. This is important to help us understand the demand for cash balances and the level of consumption going forward. Interestingly it appears the PCE-deflator leads the savings rate; as prices rise faster the savings rate increases with a significant lag. This also has something to do with interest rates lagging inflation rates, making savings appear more/less attractive.

Accordingly, as prices have fallen over the last year, real MZM rates remain low, consumer confidence has increased, relfation has begun, and the USD F/X value has fallen there seems to be all the incentive in the world for people to curtail savings going forward. This is what the following charts seem to say as well.