Published as part of the ECB Economic Bulletin, Issue 1/2025.
Over the past few years private consumption has risen at a slower pace than real disposable income.[1] Chart A illustrates the diverging paths of real income and private consumption during the last three years. According to the national accounts, real household income increased by 3.8% between the second quarter of 2022 and the second quarter of 2024. However, real private consumption did not follow the same trend, growing by only 1.2% over the same period. It is well documented that past personal experiences affect the economic decisions of households.[2] Thus, one possible explanation for the slower consumption growth is that the recent inflation surge has scarred people’s beliefs, causing households to perceive their real income to be lower than it actually is.[3] As households adjust their actual consumption on the basis of these beliefs, such perceptions can have an effect on consumer spending. In this box, we use data from the ECB’s Consumer Expectations Survey (CES) to assess this factor for the euro area.
Chart A
Real household disposable income and consumption
(Q2 2022 = 100)
Sources: Eurostat and ECB calculations.
Note: The latest observations are for the second quarter of 2024.
The inflation surge seen in the past few years has had a negative impact on how consumers perceive their real income. In response to a qualitive question in the September 2024 CES, only 37% of respondents (21% in response to the same question in September 2023) reported that their real household income had increased or stayed the same (Chart B, panel a). This stands in stark contrast to the growth in real income of the same households based on their self-reported nominal labour income in 2023 and 2024 and official country-specific inflation rates.[4] These implied real income realisations show that over 50% of all households experienced positive real income growth during the same period. Thus, households have a much more pessimistic perception of their real income than their actual real income would imply – although this perception has improved since 2023. This suggests that the recent inflation surge has had a negative impact on households’ perceptions.
Chart B
Real income perceptions and realisations
a) Perceived and actual real income changes
(percentage of households)
b) Misperceptions across income percentiles and countries
(net percentage of pessimistic households)
Source: ECB Consumer Expectations Survey (CES).
Notes: Weighted data. Panel a) shows households’ real income perceptions in 2023 and 2024. Survey respondents were asked the question: “Thinking about the percentage change of the total net income of your household in comparison to the percentage change of prices in general during the past 12 months, which of the following statements applies best?”. The answer options were: “The total net income of my household…1) increased more than prices in general, 2) increased less than prices in general, 3) decreased, 4) changed about as much as prices in general”. Income realisations are based on actual self-reported nominal labour income levels in 2023 and 2024 and country-specific inflation based on the Harmonised Index of Consumer Prices (HICP). In panel b), “net percentage of pessimism” refers to the difference in the percentage of households that perceived a decrease in real income while their implied real income increased and the percentage of households that perceived an increase in real income while their implied real income decreased. Income percentiles are calculated using self-reported nominal labour income levels in 2023, by country. For both panels, the latest observations for income realisations are for October 2024.
Pessimism about real income is more widespread among lower-income households. The net percentage of pessimists – or the difference between the share of people who underestimate changes in their real income minus the share of people who overestimate such changes – is much higher at the bottom of the income distribution than it is at the top (Chart B, panel b). This is likely a reflection of differences in the composition of their income (financial versus labour), their consumption basket or level of financial literacy. The prevalence of pessimistic perceptions is relatively evenly distributed across all countries in our sample, except for Belgium. The less pessimistic real income perceptions among Belgian households seem to be related to the widespread (and well understood) indexation of wages and other incomes to inflation in that country, which has accelerated the realignment of nominal incomes to higher prices.[5]
Pessimistic perceptions about real income have a negative impact on actual consumption. Based on observations of households with increasing real income between 2023 and 2024, the sample can be classified as (i) households with increasing real incomes that correctly perceive their real incomes have increased; and (ii) households with increasing real incomes that perceive that their real incomes have decreased. The impact of pessimism is estimated by comparing the changes in consumption of these two groups. For households that believe their incomes have decreased although they have not, this pessimism might negatively affect their realised consumption compared with households that correctly believe their real incomes have increased. Chart C shows the difference in total changes in consumption for these two groups between 2023 and 2024. Pessimistic households show significantly more negative changes in consumption than those that correctly perceive increases in their incomes. This difference is visible in all consumption categories, but it is greater in services than in necessities and durable goods.
Chart C
Impact of pessimism on consumption
(monthly consumption changes, 2023-24, in euro)
Source: ECB Consumer Expectations Survey (CES).
Notes: Weighted data. Perception errors are defined as increases in real income in households that have been perceived as decreases. Estimates are based on a differences-in-differences specification between 2023 and 2024 for the two groups (real income increase perceived as an increase and real income increase perceived as a decrease). The estimated differences are depicted in the form of bars with the yellow error whiskers representing the 90% confidence interval. The latest observations for income realisations are for October 2024.
As the scarring effects of the recent inflation surge dissipate, consumption is expected to catch up with real income growth. The recent inflation surge has strongly affected households’ real income perceptions, with a negative impact on actual consumption. As pessimism following large economic shocks typically disappears, albeit gradually, consumption should gain momentum as perceptions about real incomes improve.[6]
For a more detailed exploration of how experiences can “scar” consumers, see Malmendier, U. and Shen, L.S., “Scarred Consumption”, American Economic Journal: Macroeconomics, Vol. 16, No 1, 2024, pp. 322-355. For previous work on understanding developments in, and perceptions of, household disposable income, see the box entitled “A primer on measuring household income”, Economic Bulletin, Issue 8, ECB, 2023. Other possible explanations for the slower consumption growth may relate to rebuilding buffers after a large shock, uncertainty about geopolitical events, or time lags in spending adjustments that are not related to the scarring of beliefs.
For a summary of recent advances in behavioural economics regarding the role of long-lasting effects of past experience in economic decisions, see Malmendier, U. and Wachter, J. A., “Memory of Past Experiences and Economic Decisions”, The Oxford Handbook of Human Memory, 2024.
See, for example, Colarieti, R., Mei, P. and Stantcheva, S., “The How and Why of Household Reactions to Income Shocks”, NBER Working Paper, No 32191, 2024.
Households report their labour income (including self-employment income) every quarter, which allows annual changes in household-level real income to be computed using official inflation rates. Using respondent-specific inflation perceptions instead of actual inflation rates does not change the results and current inflation perceptions do not explain the pessimism in the responses to the qualitive question. Hence, the pessimism reflects a perception of a negative real income shock that is persistent over time.
See, for example, Jonckheere, J. and Zimmer, H., “Wage-price dynamics and monetary policy”, NBB Economic Review, No 4, 2024.
The new behavioural economics literature, as summarised by Malmendier, U. in “Experience Effects: The Longlasting Effects of Crises and Other Past Experiences on Expectations and Economic Decisions”, lecture at the 2022 Pension Research Council Virtual Symposium, Wharton School of the University of Pennsylvania, 31 March 2022, emphasises the gradual nature of adjustments to past economic shocks.