The Permanent Income Hypothesis

The Permanent Income Hypothesis suggests that individuals aim to maintain a stable standard of living over time, basing their spending not just on current income but on their expected long-term income. People tend to save during high-income periods and spend more when their expected future income is steady or increasing, rather than reacting solely to temporary income changes. This way, their consumption habits are driven by an overall sense of permanent income rather than short-term fluctuations, helping them smooth out spending over their lifetime.