Permanent Income Hypothesis

The Permanent Income Hypothesis suggests that people decide how much to spend based on their expected long-term average income, rather than just their current income. If they expect their income to stay steady over time, they’ll plan their spending accordingly. Temporary changes, like a bonus or temporary job loss, have less impact on their overall spending habits. Essentially, individuals smooth out their consumption, saving during good times and spending during bad times, based on their view of their permanent earning power rather than short-term fluctuations.