Recessions Wear Red: The Lipstick Index as a Recession Indicator.

Imagine a stressed professional checking this month’s salary , rising worries about how bills are stacking up, but there’s nothing left to save or put to the side. Stressed by life, they turn to retail therapy for comfort. It never disappoints. Suddenly, the new matte absolute lipstick from a designer brand appears. For only €50! Against all rational odds, it will most likely be bought. Why do people spend on luxuries when logic says the opposite?

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What is the lipstick index?

For years, the term lipstick index has circulated as a made-up theory to describe a certain economic state. The lipstick index captures the frequent phenomenon in which consumers become more willing to purchase lower-priced luxury goods when facing economic crises. The term was popularised by Leonard Lauder of Estée Lauder in 2001 when lipstick sales rose following the September 11 attacks. This is not the only example. During the Great Depression (1929-1933), cosmetics were among the primary means to signal wealth and glamour. Similarly, post World-War II nylon stockings and lipstick were popular first things to buy while the economy was still unstable, with the 2008 Financial Crisis also indicating a comparable pattern in consumer behaviour. The income elasticity of demand for lipstick declined from 0.31 to just 0.05, indicating that consumption increased despite worsening macroeconomic conditions as can be seen in the figure below. Lipstick purchases became much less sensitive to income changes, and people kept buying (or even increased purchases) even as the economy worsened. More recently, during the COVID-19 pandemic, both L'Oréal and Estée Lauder experienced peak stock prices and 5% sales increases despite the economic slowdown and everyone wearing masks over their lipstick. Prestige beauty in the US grew 14% in 2023, driven by the focus on high-performing or emotionally charged products. How does that work? People realise large luxuries (expensive vacations, designer handbags) are unattainable, while smaller ones (premium lipstick, high-end coffee) become an affordable window into the dream world of luxury. The price point makes them feel accessible while still delivering the luxury hit of dopamine and the feeling of pampering oneself. 

Source: Li et al. (2020)

People often engage in mental accounting, assigning subjective value to money in ways that violate basic economic principles. We create mental "buckets" for different types of spending. A €30 item feels like a larger expense when drawn on a €50 in your wallet than when drawn on a €500 in your checking account. We treat found money (bonuses, gifts) differently from earned income. Small luxuries get categorized as treat money or "self-care budget" rather than savings. When comparing a €50 lipstick to a €2,000 handbag, the lipstick feels relatively affordable. Here, the ratio matters much more than the absolute price: it's the numerator-versus-denominator effect. This allows us to justify the purchase: "It's not like I'm buying the €2,000 bag". Many small routine expenses aren't mentally "booked" and are treated as petty cash rather than scrutinised spending. This allows them to go undetected in mental financial filters. Despite economic uncertainties, owning high-end items acts as psychological comfort, contributing to enhanced identity and self-worth. When the economy feels chaotic, small purchases provide a sense of agency. Emotional states such as stress, anxiety, or low self-esteem motivate consumers to seek emotional satisfaction through luxury purchases. Retail therapy provides a temporary escape from economic anxiety, and social media amplifies the message that self-care requires consumption. 

In 2026, the “frugal luxe” mindset is popularised, which involves making deliberate, emotionally resonant choices under constraints without depriving oneself. Consumers curate consumption rather than abandon it. McKinsey's 2024 survey found that 72% of consumers adjusted their spending, substituting high-cost items for lower-cost alternatives. Exceptions were found in categories deemed as "self-care" or "identity-reinforcing". In the context of the cost-of-living crisis,the lipstick effect should be understood as a social media-driven beauty industry, largely structured around making people feel insecure to encourage consumption. 

However, despite its intuitive appeal and repeated anecdotal support, the lipstick index is not a formally established or universally accepted economic theory. Empirical evidence remains mixed, and consistent econometric validation across different crises and product categories is limited. Some researchers argue that changes in consumption during downturns may reflect shifts in income constraints, substitution effects, or industry-specific trends rather than a systematic psychological mechanism. As such, while the lipstick index provides a compelling narrative, it should be interpreted with caution rather than as a confirmed macroeconomic principle.

The index does not apply uniformly across all demographic groups. It is thus very interesting to examine the heterogeneity in how consumers respond to economic stress. Microdata from the U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey during the Great Recession showed that average cosmetics expenditures increased significantly among younger women (ages 18–40). Even as overall consumption fell in many other categories, such as clothing and jewellery, the rise in cosmetics suggests a substitution toward affordable, appearance-enhancing goods. However, cosmetics constitute a relatively small fraction of total household spending — typically under 1%—which tends to rise when spending on larger discretionary categories contracts.

For most, it would be intuitive to think that buying groceries would outweigh the importance of buying makeup. However, recent market tracking data from 2023–24 show that online spending on cosmetics categories grew even as spending on groceries and non-essential goods remained constrained. Nevertheless, NielsenIQ’s research during cost-of-living pressures in the early 2020s found that lower-income consumers reduced beauty product spending and unit sales, whereas higher-income consumers experienced growth in the beauty sector, highlighting that income level moderates the tendency to seek to attain affordable luxuries under economic stress. These patterns suggest that the lipstick effect is also contingent on demographic and economic factors such as age, income, and prior spending capacity, consistent with broader theories of substitution and psychological coping rather than a uniform behavioural response.

Understanding the lipstick recession indicator doesn't mean one should stop buying those small luxuries. It should encourage conscious purchasing, awareness of what is really being purchased: not just a product, but a feeling, an identity marker, a small assertion of control in an uncertain world. And sometimes, that's worth €50. Recessions may wear red. The question is whether we’re choosing the color—or letting it choose us.