Cleveland Fed economists have written a paper focusing on the counterfactual used when thinking about excess savings accumulated by households through the post-pandemic period. In particular, they draw upon the Permanent Income Hypothesis (PIH).

• “According to counterfactual savings determined by the PIH, excess savings are positive if households assume that the recent declines in disposable income are transitory.”
• “While there is evidence that households view recent declines in real income as transitory, implying continued inflationary pressure under the PIH, there is significant uncertainty regarding whether these declines will be recouped.”
• “If households believe these losses will not be recovered, there will be a downward adjustment in PCE, and inflationary pressures may ease.”
• The paper adds to findings from a discussion MNI had with SF Fed economists Abdelrahman and Oliveira, more of which can be found here, who noted that household excess savings are currently thought to have peaked at $2.1tn by Aug'21 and have since fallen to about $430bn. Prior work of Abdelrahman & Oliveira is indeed quoted in this Cleveland Fed paper.

Source: Cleveland Fed