Americans' pandemic savings will make it much tougher for the Fed to cool inflation, Wells Fargo says

• US households have around $1.2 trillion in pandemic savings, according to Wells Fargo.
• But that could be bad for the Federal Reserve's inflation battle, the bank warned.

Americans still have a pile of pandemic savings, and that could make it significantly more difficult for the Federal Reserve to suppress soaring inflation, Wells Fargo has said.

Consumers are likely to remain "relatively price insensitive" as long as they can dip into their savings to pay for items as they become more expensive – which will drive up inflation, the bank said in a research note Tuesday.

The latest Consumer Price Index report, which showed an increase in spending on both goods and services despite inflation remaining high, "is bad news for policymakers at the Federal Reserve", Wells Fargo economists Tim Quinlan and Shannon Seery said.

"Monetary policy acts with a lag, but at this early stage, consumers' spending is more or less unfazed not only by high inflation but also the rate hikes intended to get prices under control," they added.

Social distancing measures led to a significant decline in spending, and that has helped US households rack up an extra $1.2 trillion in savings since March 2020, according to Wells Fargo.

Americans also piled a record $2 trillion in cash into deposit accounts in the three months after the coronavirus crisis started.

"The staying power could actually be a negative for the Federal Reserve," Quinlan and Seery said.

The US central bank has raised interest rates by 75 basis points at three consecutive meetings and is widely expected to implement another jumbo-sized hike when its November meeting concludes Wednesday.

But inflation has remained stubbornly close to a four-decade high, hitting a red-hot 8.2% in September.

The Fed will struggle to curb soaring prices as long as Americans have extra savings to dip into, according to the Wells Fargo economists.

The extra savings will also allow retailers to carry on ramping up their prices, according to Wells Fargo.

"Firms have little incentive to rein-in price hikes as long as consumer spending continues to rise," Quinlan and Sheery said.

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