Higher rates and inflation drive post-COVID euro area savings
A Banca d'Italia Occasional Paper examines why euro-area consumption remained weak and saving rates elevated through 2025 despite recovering income. Authors Donato Ceci, Claudia Pacella and Fabrizio Venditti use scenario analysis to identify interest rates, energy inflation, and eroded financial wealth as key drivers.
Tight monetary policy and eroded wealth damp consumption
Banca d'Italia researchers Donato Ceci, Claudia Pacella and Fabrizio Venditti examine weak euro-area consumption dynamics following the COVID-19 crisis.
Despite recovering disposable income and government energy shock mitigation, the saving rate remained over 2 percentage points above its pre-pandemic average through 2025.
Using a large-scale Bayesian vector autoregression model, the authors evaluate six potential explanatory factors.
The analysis reveals that tighter European Central Bank monetary policy significantly dampened consumption through higher interest rates.
Simultaneously, energy inflation and the erosion of real financial wealth acted as major headwinds, each accounting for nearly a full percentage point of the increase in the saving rate.
The income composition puzzle
The paper notes that while standard headwinds explain much of the downturn, the upward surprise in aggregate disposable income stems largely from rising property income and government net transfers.
Because property income typically accrues to wealthier households with a higher propensity to save, income composition played a crucial role in boosting savings.
Furthermore, persistent consumer pessimism left lasting scars on spending behavior, leaving a portion of highest saving rates unexplained by standard models.
Scars of an exceptional crisis
This robust scenario analysis proves post-pandemic savings stem from tight monetary policy and wealth erosion.
Yet, treating aggregate income growth as homogeneous masks how wealth distribution fuels persistent caution.
Central banks must acknowledge that large shocks create structural shifts that standard forecasting models miss.