The Lipstick Effect: Why consumer spending is resilient amid high prices

Patrick Diedrickson, Director – Ameriprise Financial

Dec. 16, 2024

Overall consumer spending has been resilient, in our view, despite showing signs of weakness from macro pressures such as inflationary costs and higher interest rates. However, households are adjusting their spending behavior, and becoming increasingly selective, in the face of higher costs.

These changes may be creating an opportunity for some businesses. Here’s what may be driving this shift:

The Lipstick Effect

Despite becoming increasingly selective, household spending has been durable. We believe one explanation of resilient consumer spending in recent quarters could be due to a theory called the Lipstick Effect.

The Lipstick Effect was popularized following the 2001 economic downturn by Leonard Lauder, the chairman of Estee Lauder, who noticed that lipstick sales often increased during challenging macroeconomic conditions. The theory suggests that consumers still want to indulge themselves despite being strapped for cash. Sales of small luxury items can still experience solid sales growth during economic recessions.

What businesses are poised to benefit?

The Lipstick Effect may be a reason why casual restaurants and movie theaters often outperform during economic recessions. Cash-strapped consumers may not be able to afford a trip to Europe, but they can settle for an inexpensive dinner and a movie. Despite increased economic uncertainty caused by inflationary pressures and higher interest rates, consumers can still purchase non-essential items to preserve a sense of indulgence.

As such, categories that are positioned to benefit from a potential Lipstick Effect period could include health and wellness, beauty products, entertainment and casual restaurants. Warehouse retailers and off-price retailers may also be positioned to outperform from higher-income consumers trading down for non-essential discretionary spending, in our view. We believe dollar stores and businesses that target lower-income households as well businesses that target younger consumers may lag in the current environment because their core consumers are planning to be more frugal than Gen Xers and higher-income households.

Bottom line

In our view, consumer spending could continue to hold up relatively well unless there is a significant deterioration in the labor market. Middle-income and higher-income households will likely be able to absorb inflationary and interest rate pressure. That said, lower-income households may experience a consumer spending headwind over the next few quarters, resulting from macro challenges.

Your financial advisor is here to help

If you have questions about what the current macroeconomic environment may mean for your finances and investment portfolio, connect with your Ameriprise financial advisor. The new year is a good time to evaluate your current financial position, review your portfolio’s performance and make adjustments to your financial strategy so that you’re on track to reach your goals.