European Central Bank research finds inflation-scarred income perceptions have held back euro area consumption

The European Central Bank published research in its Economic Bulletin examining why euro area private consumption has lagged real disposable income in recent years, and links the divergence to households underestimating their real income after the inflation surge. Between the second quarter of 2022 and the second quarter of 2024, real household income rose by 3.8% while real private consumption increased by 1.2%. Using the ECB’s Consumer Expectations Survey, the analysis finds a persistent gap between perceived and implied real income changes: in September 2024, only 37% of respondents reported that their real income had increased or stayed the same, despite implied real income measures suggesting that over 50% experienced positive real income growth (an improvement from 21% reporting increases or no change in September 2023). Pessimism is more prevalent among lower-income households and is broadly similar across countries in the sample except Belgium, where wage and income indexation to inflation appears to support less pessimistic perceptions. Comparing households with rising real incomes in 2023-24, those who perceived a real income decline showed more negative consumption changes than households that correctly perceived an increase, with a larger effect in services than in necessities and durable goods. The research concludes that as the scarring effects of the inflation surge fade and real income perceptions improve, consumption is expected to gain momentum and catch up with real income growth.