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Negativity Bias & Consumer Sentiment
Date: April 24, 2025
Why It Matters:
Negativity bias is the phenomenon that people give greater priority to negative experiences. Based on the Federal Reserve Board, people may be experiencing negativity bias when it comes to the economy. Particularly, it seems that higher prices due to inflation (negative) is affecting consumers more than the positive factors like rising income and low unemployment.
Executive Summary:
This Federal Reserve Board note investigates the disconnect between consumer sentiment and actual spending behavior. Despite economic indicators such as low unemployment, moderating inflation, and rising incomes since mid-2022, consumer sentiment remained unusually low at the end of 2024. The analysis links survey responses to verified retail purchases, revealing that even individuals reporting negative sentiment continued to spend at strong levels. The findings suggest that perceptions of income not keeping pace with prices and the effort required to adapt to rising costs contribute to the negative sentiment, even among those with increased incomes. This pattern mirrors consumer sentiment trends during past inflationary periods, where concerns about higher prices outweighed concerns about lower income.
Key Provisions:
- Consumer Sentiment Decline: Consumer sentiment deteriorated since 2019, remaining low through the end of 2024, despite positive economic indicators like low unemployment and rising incomes.
- Strong Spending Behavior: Verified retail purchases indicate that spending remained strong even among those who felt they were doing much worse or experienced income losses as of 2024.
- Perception of Income vs. Prices: Negative sentiment appears driven by the perception that incomes have not kept up with prices, despite increases in real spending.
- Behavioral Adjustments: Individuals who reported making significant changes to reduce spending since 2019 exhibited worse sentiment, indicating that the effort to adapt to rising prices impacts their economic outlook.
- Increased Workload: Even those with increased incomes reported negative sentiment, often citing the need to work more hours or take on additional jobs to earn extra income.
- Historical Context: The current pattern aligns with consumer sentiment during other inflationary episodes, where concerns about higher prices were more influential than concerns about lower income.
