Canadian Households Are Saving A Little Less Cash, Lost $63.5 Billion To Inflation

Canadians are still saving at an elevated rate, but it’s on the path to normalization — that’s a good thing. Statistics Canada (Stat Can) data shows the household savings rate fell to 6.4% in Q4 2021. The rate was 9% in the previous quarter and 11.4% in the same quarter last year. A shrinking savings rate might sound like a bad thing, but when it’s this elevated it’s a positive for the economy.

Canadian Household Savings Rate

The rate of disposable income Canadian households are saving.

Source: Bank of Canada; Better Dwelling.

Canadians Are Still Socking Away An Unusual Amount of Cash

Common convention is savings are a good thing and households should save more cash. It’s true, but there’s a big difference between saving and hoarding capital. Excessive saving tells us there’s a problem for consumer spending and confidence.  

Households cut back on spending when they’re worried about their financial position. Recessions, war, etc.. all lead people to put away a little extra money. Exercising a little caution makes sense, but each dollar saved is a dollar not spent in the economy. In times of recession, saving a lot can divert too much from business revenues. This can intensify the shock further, since that means businesses will need to cut back a little too.

Before 2020, the 5-year average savings rate was 2.24% — less than half the current rate. If we’re being positive, it’s way below the 27.2% peak seen in Q2 2020. Canada’s savings rate is still high, but on the way to normalization. As more businesses reopen and travel resumes, the rate will fall further.

Savings Can Drive Inflation Higher, But Less Than Implied

Elevated savings can drive inflation even higher, and it’s already very high. Households sitting on $300 billion in savings is a popular narrative from policymakers. They keep saying we’re going to see “revenge spending,” a scenario where pent up demand is unleashed to spend the capital saved. With any fast rise in demand, the possibility of more inflation is present. There’s reason to believe the amount available for spending is much lower though.

Looking at household bank accounts, the amount ready to spend is much lower. From Feb 2020 to Dec 2021, households socked away an additional $201 billion in savings. Annual growth for Dec 2021 was 4.30%, closer to historic norms outside of a recession. It’s still a lot of money, but a third less than the headline number shows. The remainder is believed to have been spent on things like paying down debt. 

Canadian Savings In Personal Bank Accounts

The annual percent change in the balances of personal bank accounts.

Source: Bank of Canada; Better Dwelling.

High savings are also being used to offset household pressures from elevated inflation. Over the past year 5% of those savings are lost once adjusted for CPI, and the rate is still rising. That’s a loss of $10 billion in buying power on the funds saved from Feb 2020 to Dec 2021. Total cash in bank accounts lost $63.5 billion in buying power when inflation adjusted for Dec 2021. 

Canadians are still saving at a very high rate, but it’s beginning to slow. The rate is almost a quarter of the peak seen in early 2020. As inflation rages on, the buying power of those savings is eroding very quickly when left in cash.

9 Comments

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  • Mike 10 months ago

    Bloomberg reported that most of the savings comes from the top 20% of the wealthiest households.It significantly drops from there.Maybe they think top 20% will suddenly buy 8 cars , book 12 vacations and have there kitchens remodeled 5 times.Recession is here and its getting worse fast.Work in flooring industry which 95% of work is directly
    related to housing for the last 5 years.We are all very slow and its becoming worse.

  • Remington 10 months ago

    I really don’t know who guys are talking about when you say Canadians are saving. As if you’re writing an article and referring to people on another planet. Most Canadians I know are one pay check away from extinction.

    • Kate Wright 10 months ago

      The Finance minister has repeated many times that households saved $300 billion. There’s an analysis somewhere on BD showing only the top 40% of households saved while the bottom 40% were net debtors over this period.

      They’re inflating the money away like the bottom has what the top does, without realizing they’re just grinding them to dust.

  • Ron Bruce 10 months ago

    Savings will mostly come from uninterruptable income and indexed pensions (i.e. Government employees – Federal, Provincial, Municipal) which is over 30% of the economy. The remainder competing on the global stage will see downsizing, bankruptcies, automation and new technologies either eliminating or changing the way businesses work today (aka a moving target). Canada needs technical expertise as we’ve never seen before. Relying on Forestry, Fishing and other depleted natural resources to pull the tax train is nineteenth-century thinking. Will we see these technical savvy people in Parliament or Government decision-making roles ?????????

  • Amjad Maqsood 10 months ago

    First the govt gave free money to households and then BoC facilitated pouring easy money into the system through low interest mortgages and created huge assets price bubble: this caused huge income inequalities in the society.

    Now, the aftermath of quantitative easing, inflation, will again pay havoc with the purchasing power of middle and lower middle classes, thus causing more income inequalities. This is how bad economic managers implement anti poor economic policies, benefiting haves and depriving the poors.

  • Evanne 10 months ago

    Don’t you know Canadians are rich? (whether they believe it or not)

    In the next few years, savings are going to sky rocket because wages are going to go up due to inflation.

    Housing price is going to go up further as wages increase.

    This generation of Canadians are going to have a very high standard of living in the coming decades.

    • Kate Wright 10 months ago

      This is the definition of a deflationary spiral and it’s not a good thing. Hang onto your TiffBucks.

  • amjad 10 months ago

    Wage increases would’t help the salary class, Inflation and assets price increases would widen the gap between rich and poor; the Canadian govt does not care how the poor will suffer because of irresponsible economic policies.

  • amjad 10 months ago

    The house owners and those who seized the opportunity of buying homes at ultra low interest rates would be the only gainers in this unjust public policy game.

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