Pent-up demand is when an economy experiences consumer demand for goods and services that has been building up over time, typically due to a recession. After delaying the purchasing of goods and services due to uncertainty surrounding economic downturns, people typically are eager to spend money on consumer goods.
Once an economy recovers and the pent-up demand for goods and services is released, this will lead to high levels of consumption and sometimes, shortages of goods and services. Let’s take a closer look at what pent-up demand means and how it works.
Definition and Examples of Pent-Up Demand
Pent-up demand refers to the high level of demand unleashed on the market once a recession is over. This demand has been building over time because people spend less money during a recession due to the uncertainty of jobs and the economy. Once people feel comfortable with the economy and the status of jobs and income, they usually begin spending money again on goods and services.
With pent-up demand, people do not usually buy only their normal goods and services, but also spend money on purchases they have forgone for months due to the recession. Typically, durable goods tend to be delayed the most during a recession because they are costlier to purchase. As pent-up demand comes to the market during an economic recovery, businesses will try to ramp up supply to meet the need.
For example, during a recession, you may only spend money on groceries, gas, and other necessities you need in order to live and work. However, once the recession is over and you feel more comfortable with the state of the economy, you may spend more money on dining out, entertainment, and more. This is known as your discretionary income.
How Does Pent-Up Demand Work?
People delay purchasing goods and services during a downturn in the economy or a recession. If enough people do this and are eager to buy products in the market once the economy recovers, this will lead to a very high level of demand being unleashed on the market at once. Pent-up demand may cause certain products to become unavailable since there is a rapid increase in spending on them after a period of no or little spending.
If demand increases rapidly, this can cause short-term equilibrium prices to rise in many markets. If the overall price level rises, the economy will experience inflation.
Pent-up demand can cause inflation if the increase in spending on goods and services is substantial and across many goods. Once demand falls back to normal levels or supply increases to meet demand, prices should adjust downward.
Due to the pandemic and shutdowns of businesses in 2020, people delayed purchasing goods and services, which led to pent-up demand.
The graph below shows the pent-up demand for durable goods in the United States. This is shown through real personal consumption expenditures (PCE), which is a measure of consumer spending on goods and services.
While the line in the graph initially falls because people delayed purchasing durable goods, the pent-up demand for durable goods is evident by the drastic increase of durable-goods purchases over the course of the economic recovery after the pandemic. The graph also shows the impact of stimulus checks on spending.
In addition to people delaying purchases of goods during the recession in 2020, strong unemployment benefit programs and pandemic-era relief programs put more money in the hands of consumers. This led to higher levels of demand for certain goods and services, such as durable goods.
While consumers often delay purchases of durable goods during recessions, this particular period of pent-up demand in 2020 saw higher levels of durable goods being bought during the economic recovery. A large part of this is because of consumers spending more time at home and accomplishing tasks they might have purchased as services before the pandemic.
For example, people may not have been eating out frequently at restaurants during the pandemic because they were cooking at home. Once the economic recovery started, people may have spent money to upgrade kitchen appliances to cook at home or may have started dining out again.
- Pent-up demand refers to consumer demand for products and services that builds over time due to a recession.
- People delay purchasing goods and services during a recession, which leads to a large amount of buying once the recession is over.
- Pent-up demand can contribute to an increase in inflation after an economic recession.
- Pent-up demand during the 2020 recession led to the purchase of many durable goods.