By Patrice Ollivaud and Ben Westmore.
Consumption growth remains weak in OECD economies, despite buoyant real disposable income growth over the past two years (Figure 1, Panel A). Households in many countries are opting to save a greater proportion of their income and this accords with their lingering concerns regarding the economic environment. While consumer confidence is gradually recovering, it remains below long-term average levels in most economies (Figure 1, Panel B). So what have been the factors shaping consumer moods and can we expect their outlook to brighten in the near-term?
Figure 1. Private consumption has been sluggish despite strong real income gains
Note: Based on 28 advanced economies. In Panel A, median real disposable income and private consumption growth are based on the cross-country year-on-year growth rates of household disposable income and private consumption, respectively, deflated by the personal consumption deflator. In Panels B, consumer confidence data are standardised so that the long-term average and standard deviation are zero and one, respectively. The mean refers to a weighted mean using GDP in PPP as weights.
Source: OECD Economic Outlook 116 database; OECD Consumer Opinion Surveys database; and OECD calculations.
In the latest OECD Economic Outlook, this question is explored by estimating a panel model for seven OECD countries (France, Germany, Italy, Japan, Spain, the United Kingdom and the United States) over 2001-2024. The results highlight the extent to which consumer confidence is affected by inflation, along with several other aspects of economic conditions, including economic growth (proxied by the composite Purchasing Managers’ Index), the unemployment rate, interest rates and stock market values. In most of the countries in the sample, the model explains a significant proportion of changes in consumer confidence over the recent period.
However, the analysis suggests that not all types of inflation are equal in their impact on consumer sentiment. Food and energy inflation are found to have a particularly significant effect: the rise in food and energy inflation is estimated to explain three quarters of the decline in consumer confidence through the 2021-22 period in the average country in the sample. This accords with past findings that households can be more sensitive to price changes of frequently purchased items, such as groceries and energy (Anesti et. al. 2024; Binder and Makridis, 2022).
An implication of the empirical results is that a further decline in food and energy inflation could have a marked impact on consumer confidence and willingness to spend. Despite a recent decline in food and energy inflation, the level of food and energy prices relative to core consumer prices (excluding food and energy) still remains high compared with the pre‑pandemic period in the sampled countries (Figure 2, Panel A). For example, the ratio of food and energy prices to core prices in Germany in September 2024 was 16 percentage points above the level in December 2019.
An alternative model that seeks to explain the level of consumer confidence by developments in this price ratio, along with the other important economic variables from the above specification, finds the price ratio to be statistically significant (Ollivaud and Westmore, 2025). This allows a calculation of the estimated increase in consumer confidence if the price of food and energy relative to core consumer prices were to return to the pre-pandemic level. In Germany and France, such a decline could return standardised consumer confidence to around its long-run average level (Figure 2, Panel B). In contrast, the same scenario is estimated to push consumer confidence substantially above its long-run average in Italy and Spain. This reflects the comparatively high level of confidence in these countries already, helped by recent declines in their unemployment rates, larger falls in long-term interest rates over the past year and, for Spain, relatively strong economic growth. For the United States, the positive impact on consumer confidence of a retracing of the ratio of food and energy prices relative to core consumer prices is estimated to be more muted, owing to the comparatively low starting point of the price ratio in that country. Nonetheless, the results overall suggest consumer moods in many countries could brighten significantly if further falls in food and energy price inflation were to occur.
Figure 2. Further declines in the price of energy and food relative to core items would boost consumer confidence
Note: The ratio of (energy and food)/core prices is based on the personal consumption expenditure price index for the United States, harmonised index of consumer prices for euro area member states and the United Kingdom, and national consumer price indices for Japan. In Panel B, consumer confidence data are standardised so that the long-term average and standard deviation are zero and one, respectively. The “food and energy price scenario” assumes that the ratio of (energy and food)/core prices reverts to its level in December 2019, with the estimates based on coefficient estimates from a model that regresses the level of standardised consumer confidence on a lagged dependent variable, the ratio of food and energy prices to core prices, the composite PMI, long-term interest rates, the unemployment rate and the COVID Stringency Index. All variables are estimated to be statistically significant with the expected sign under this specification.
Source: Bureau of Economic Analysis; Eurostat; Statistics Bureau of Japan; OECD Consumer Opinion Surveys database; and OECD calculations.
References
Anesti, N. et. al. (2024), “Food prices matter most: sensitive household inflation expectations”, CFM Discussion Paper, No. CFM-DP2024-34, London School of Economics.
Binder, C. and C. Makridis (2022), “Stuck in the Seventies: Gas Prices and Consumer Sentiment”, Review of Economics and Statistics, Vol. 104, No. 2.
OECD (2024a), OECD Economic Outlook, Volume 2, December 2024: Resilience in Uncertain Times, OECD Publishing, Paris.
OECD (2024b), OECD Economic Outlook, Interim Report September 2024: Turning the Corner, OECD Publishing, Paris.
Ollivaud, P. and B. Westmore (2025), “Decomposing the Vibe: Exploring the Recent Drivers of Consumer Confidence”, OECD Economics Department Working Papers, forthcoming.