How do changes in interest rates affect consumption? Let’s talk about it if you understand

When the interest rate is high, people will increase their deposits and reduce consumption in order to get interest; when the interest rate is low, people will think that saving money is not cost-effective, so they will increase consumption.

First, the lower the interest rate, the higher the savings rate. The unemployment rate and savings rate are a little clearer. An increase in the savings rate is usually accompanied by an increase in the unemployment rate. The relationship between the unemployment rate and the savings rate is logically easy to understand, but after 2017, the two diverged. There were also several departures after 1972. It often occurs three years before a recession: 1998, 1987, 1983, 1977. There was no recession in 1986, but economic growth slowed from 8.5 to 3.0. In addition, prices and savings seem to have a certain relationship in the same direction. The higher the inflation, the higher the savings. There is a logical problem. But intuitively, the relationship between inflation and savings seems to be stronger than the relationship between real interest rates and savings.

Second, instead of using core prices, use prices that include food and energy.

The current price increase is subtracted from the average price increase in the past 12 months, and a difference is obtained, which is regarded as the expansion of inflation. Then turn the curve upside down. Historically, lower real interest rates have led to higher savings rates. Not always. But it happens often. Based on the principles of unemployment and savings rates, lower than expected income will increase the savings rate. Income comes from many aspects, one is salary, and the other is cash flow return on investment (rent, dividends, interest), etc. Theoretically, interest rates have two effects on savings. Substitution effect, interest rates fall, savings fall out of favor, and consumption is stimulated. The income effect, where interest rates fall, cuts income and consumption falls. So it depends on whether there are more young people or middle-aged people. For middle-aged people, it is more of an income effect, and for young people, it is a substitution effect. Because young people are new entrants and have not yet started saving.

Third, according to preference theory, when the rate of return is too low (interest rates on bonds, dividends on stocks), people tend to sell securities. The same is true for financial products. According to common sense, interest rates will fall, and then holdings will be reduced. Then, the share of funds involved in speculation or financial management should fluctuate in the same direction as interest rates. When interest rates rise, funds involved in speculation or financial management expand, and when interest rates fall, they decrease. This was very obvious in 1959-2000. The actual observation results are in line with the theoretical logic. In addition, in 1975, the two indicators also diverged. The environment at that time was that the real interest rate was lower than (-2).