Pandemic savings of £196 billion could offer inflation buffer

Laith Khalaf
6 June 2022
  • Households saved £195.9 billion over the course of the pandemic, according to data released by the ONS today
  • 74% (£144.9 billion) of this was forced by COVID restrictions
  • This could prove valuable in the fight against inflation
  • Household savings ‘war chest’ dwarves government cost of living measures
  • But the ability to save wasn’t spread evenly
  • Some wealthier households are holding too much cash

Laith Khalaf, head of investment analysis at AJ Bell:

“The pandemic created a unique set of circumstances, which saw the UK’s savings ratio peak at nearly 24% thanks to a lack of spending options, and the furlough scheme helping to maintain workers’ incomes. The ONS reckons the savings ratio would have peaked at just 9% had we been able to loosen our purse strings in pubs and restaurants, and that £144.9 billion of saving was forced upon us by COVID restrictions.

“In total £195.9 billion was saved by consumers over the course of the pandemic. That cash now looks like a valuable tool in the fight against inflationary pressures, which are ratcheting up at an alarming rate. Indeed, this savings war chest dwarves the substantial £37 billion support package that the government has thrown at the cost of living crisis.

“However, more has been saved by wealthier households with the largest disposable incomes. Bank of England research conducted in 2020 found that 42% of high income households had grown their savings during the pandemic, compared with 22% of low income households. While inflationary pressures are mounting this cash buffer could be valuable, but it shows that the positive financial effects of the pandemic were not evenly spread.

“Although the Bank of England research shows that, overall, 28% of people added to their savings, 20% depleted their cash buffer during the pandemic. This was particularly common among those who found themselves unemployed or on furlough. It means the most vulnerable consumers, who were unable to save any money during the pandemic, have less to shield them from the vagaries of inflation.

“The fact wealthier households have some spare cash following the pandemic may make them less demanding of wage increases to cover higher energy bills, which could actually prove helpful for inflationary pressures in the longer term.

“For these households, however, there is the question of how productively they are using their cash. The FCA estimates that over 8.5 million consumers hold more than £10,000 of investible assets as cash. One of the regulator’s key missions is to significantly reduce the number of consumers who are missing out on investing in the stock market.

“It’s definitely important to hold cash to cover short-term spending needs, and as a buffer against unemployment, even in such a buoyant labour market. The general rule of thumb is that you should hold three to six months of expenditure in cash, but any savings above that are probably more productively employed by investing in the stock market for the long term.”


Laith Khalaf
Head of Investment Analysis

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

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