Could compensatory consumption be a problem?
In a recent article posted by Marc Guberti, the author noted that at the end of the pandemic, a consumption problem could arise. He observed that, in the last year, individuals have saved more than before and that in the next months when the pandemic ends, they will start to consume more. The demand will increase especially for the goods and services that were somehow prohibited in the last year. The author sees a danger in the desire to compensate the lost year, through increased consumption that would determine a fast use of the savings.
I have already assumed that we will see a strong increase in aggregate demand at the end of the pandemic, but I neglected the perspective of compensatory consumption, which somehow changes the pic picture.
If we think of physical products, from a market perspective, compensatory consumption is not problematic. Even in the weeks of complete isolation, we could order physical goods. And although most production levels are now lower than in 2019 the companies will have time to adjust these levels if the demand spikes. The assumption is that at the beginning of 2020, the human capital—technical capital ratio was close to its full potential. The inflationary pressure will be a problem only for the producers that are limited by their technical endower. In a safe world, with no social distancing, the companies that have kept their technical facilities will manage to increase production to the pre-2020 levels by increasing the personnel.
High levels of compensatory consumption will be encountered in sectors that were heavily restricted in the last year. For example, there were high restrictions on tourism, restaurants, public events, etc. The demand for these kinds of services could reach a higher level than before 2020 in just a few months.
From an economic point of view, a demand level for which the supply output cannot be rapidly increased will determine a price increase. The price increase will lower the demand and will grant other producers the time needed to enter the market. In the medium and long term, this problem will be solved by the market.
In the short term, a high compensatory consumption for highly desired products would increase the demand to a level that could not be satisfied by the producers due to external limits, like the size of the concert hall, or the availability of a band to perform only a limited number of events. The relative scarcity of public events and tourist resorts will lead to an increase in the prices, to a level where the supply could meet the demand. This will solve the immediate problem but will leave a large part of the potential customers unsatisfied.
Compensatory consumption will generate inflation and affect the standard of living but, in the medium and long term, the markets with a high number of unsatisfied consumers are great places for innovation. After the initial shock, we will see two different directions of evolution in these markets, an increase in the supply of existing products and the launching of new innovative products. The new world will bring us new ways of practicing tourism and, why not, better integration of public events with innovative technologies?
