Pent Up Demand Meaning Explained Causes Examples

Pent Up Demand Meaning

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Pent-up demand plays an important role in boosting the economy that has just normalized from the impact of the recession or depression. The recession is a significant factor in creating the demand for goods and services. The fear in the minds of consumers due to unemployment, higher inflation, and a higher rate of interest lead to refraining in consumer spending. It results in a built-up of pent-up demand.

Key Takeaways

Consumer pent up demand means consumers refrain from buying luxurious items and services during a recession and, in turn, increase their savings, converting to a huge demand for goods and services after the recession ends.It indicates a revival in production, creation of jobs, and economic growth.A recession is an important factor for this type of demand as its increases consumers’ savings due to fear of uncertainty in employment and income. It results in a rapid increase in demand, economic growth, and short-term inflation.

Pent Up Demand Explained

Pent up demand meaning describes the delaying or unwillingness purchases luxury products during the recession by the consumers. It creates a huge backlog of demand for them after the recession. As a result, when the recession ends, the economy stabilizes, and employment increases. Then the consumers buy luxury products like luxurious vacations, iPhones, and apartments. Economists, analysts, and policymakers observed a pent-up demand period after the 2008 recession of the American economy.

The basic mechanism of consumer pent up demand is that during the recession, unemployment increases, and inflation is at a high peak. Also, goods become costlier, and the bank rates go high too. All of these lead to a situation where consumers start saving their income instead of spending on luxurious items. In other words, savings increase, discretionary income decreases, and purchasing power decrease.

In this situation, people stop spending on goods other than essential commodities like food items, fuel, garments, shoes, and groceries. But start waiting for the economy to heal itself to start buying the luxury products like vehicles and appliances. It gradually builds up demands. Pent up demand for travel, big-ticket and durable goods keep increasing, or it starts building up.

People refrain and fear extra spending. Consumers start saving on thwarting uncertain economic situations for fulfilling future requirements. They try to combat future monetary troubles like liquidity constraints and limited credit accessibility. Their pent-up desire and need for certain goods and services increase. However, as soon as the economy returns to its normal level, people get confident about jobs. Their income sources increase. Therefore, people start to have increased discretionary income at their disposal. With the increased discretionary income, their purchasing power also increases after the end of the economic slowdown.

Pent Up Demand Cause

The recession also creates a lot of consumer savings and a huge build-up of consumer demand for luxurious items. The central banks of nations also bring down their interest rates to increase the flow of money in the economy. As a consequence of this demand, consumers start demanding the products in large numbers at one go after the recession ends. Moreover, sometimes it may also lead to a shortage of some products or a short-term surge in pent up inflation that falls back to normal after a while. However, most of the time, pent-up demand can push faster economic growth owing to increased production and supply of goods accompanied by employment generation.

Example

Let’s look at a pent-up demand example to understand the concept better.

Since 2020, the global coronavirus pandemic has been affecting the world. When the first wave of coronavirus swept across the globe in March 2020, every country decided to enforce a lockdown. Governments did it to curb the impact of coronavirus. According to The Bureau of Economic Analysis (BEA), in 2019-2020, the average age of fixed assets and consumer goods observed an upward trend compared to the earlier years. As a result, global economic activities like production, courier, and transportation came to a grinding halt. In addition, many people lost their jobs during this period. Hence, a shadow of economic uncertainty loomed over every sector of the business and the lives & aspirations of people.

In such a grim situation, people stopped spending more money on luxury items and services to cope with the job and income losses. Instead, it started building gradual demand for luxury items and services. Examples include stock investing, luxury vacations, clothes & watches, and phones until the first and second phases of coronavirus lockdowns ended.

When the second phase of the coronavirus pandemic ended, the global economy started recovering, and jobs were restored. Then the consumers started getting discretionary income apart from their average savings. As a result, the purchasing power increased, and the pent-up demand for luxury items and services built during the two phases of coronavirus suddenly increased to high levels. So, consumers started demanding these products rapidly in large numbers leading to a shortage of some goods and services and a rise in production of some goods. Hence, the pent-up demand led to the economy’s fast growth and temporary inflation.