How do households react to inflation?

Abstract

U.S. inflation peaked at 8.9 percent in June 2022, and, while the rate has declined substantially since then, inflation remains an important concern. This paper uses a new survey of households and financial advisors to examine how near retirees and retirees responded to recent inflation. The survey asks respondents how inflation affected their labor supply, saving, and investment behavior. It then uses regression analysis -- relating variation in the level of inflation to behavior -- to confirm the accuracy of these self-assessments. The results show moderate impacts on labor supply and large effects on saving. Specifically, 29 percent of working households increased their hours due to inflation, although very few plan to delay retirement. Additionally, 39 percent of working households reduced their saving, and 23 percent of both working and retired households increased withdrawals from existing savings. Among those making changes to saving, the reduction was large: 4 percent of 2023 household income for near retirees, and 5 percent for retirees. In essence, inflation pushed older households to shift future consumption into the present, which could end up reducing their retirement security.