Inflation
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Most studies found a positive correlation between savingsand inflation.  However, differing explanations:

1.      Deaton (1977): suggests that it’s unanticipated inflation that matters: consumers initially underestimate the average price level, and shocked by the ‘excessive’ rise in prices, cutting back their consumption in response, (until recognise higher price levels).

2.      Buckley (1981): even if inflation fully anticipated, savings ratio will increase as long as anticipated inflation is itself increasing.

3.      Cuthbertson (1982): due to inflation, the real rate of interest (nominal – inflation) often zero or negative, so real purchasing power of a given stock of liquid assets (notes/coins/bank deposits & other short-term assets) falls.  Consumers, seeking to maintain the real value of their liquid assets for reasons of security or flexibility, thus have to reduce consumption of current real disposable income/increase saving to do so. 

Other Notes in this Category

1. Access to credit / Financial Deregulation
2. Consumption
3. Consumption and Saving Exam Questions
4. Determinants of Consumption
5. Inflation
6. Interest Rates and Monetary Policy
7. Key Points
8. Other Theories of the Consumption Function
9. Problems with Consumption Functon
10. Unemployment/Consumer Confidence/Uncertainty
11. Wealth Effect – Asset Prices, Debt Burden, and Windfall Gains

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