If you’ve ever treated yourself to small luxuries when feeling the financial pinch, you might just be part of ‘the lipstick effect’ – and it can apply to both men and women.
A well-known economic phenomenon, it can be a recessionary indicator – and knowing the signs can also tell you which sectors and companies are most likely to benefit.
Despite the name, the lipstick effect is about more than cosmetics. For this article, I spoke to AMP economist My Bui and ANZ economist Sophia Angala to understand what it means in modern times and whether we are starting to see the signs in the current market.
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‘The definition is affordable luxuries, although they aren’t quite luxuries any more. It is a small indulgence that you purchase to make yourself feel better in tough financial times,’ Bui explains.
‘Households may delay larger purchases and trade down to cheaper items rather than stopping spending altogether. They are more cautious,’ Angala adds.
The lipstick effect is a purchasing pattern in which consumers ‘treat’ themselves with whatever options they can afford. It was first identified by economist Juliet Schor in 1998, and the term ‘the lipstick effect’ was later coined by Leonard Lauder in 2001, when he noticed that sales of lipstick at Estée Lauder had soared following the burst of the dot-com bubble.
Other examples include buying takeaway instead of going to a fancy restaurant, buying small bag charms instead of designer handbags, using supermarket face mask packs instead of getting a facial, and going to the cinema or concerts instead of travelling on holiday.
Or perhaps choosing an Aldi Special Buy as a dupe of a more expensive luxury brand.
While it is generally a broader spending pattern, research from Bank of America suggests that 18–24-year-olds have embraced the lipstick effect as a permanent habit, with 59% treating themselves weekly.
Inflation has remained stubbornly high in Australia throughout 2026 and there have been four rate hikes. Consumer confidence has been low for some time, but has this translated into consumption patterns?
‘We have really high inflation and good population growth. The total amount of purchases is price times volume, so the price is still going up and this is supporting aggregate household spending, but if you actually look at consumption volumes per capita, they are starting to flatten out,’ says Bui, sharing a chart that highlights the downward movement from November 2025.
Source: AMP, Westpac 
Data on the lipstick effect tends to be anecdotal or found in company reports, but that doesn’t mean it isn’t happening at this point.
‘The RBA has observed among consumer-facing businesses, particularly those in retail or hospitality, that demand has eased since the beginning of the year but remains positive overall. These firms have also noted that households appear to be more cautious and price-sensitive compared with the start of the year, which would be consistent with the lipstick effect,’ says Angala.
The RBA also highlighted that some firms in its liaison programme had observed a switch to lower-priced goods.
Angala notes that there has been a recent upward trend in discretionary spending – which conflicts with the RBA’s hope of curbing discretionary purchases. July data showed an increase in spending on recreation and culture, including sporting events and higher cinema attendance, which eased in August.
‘Household balance sheets have been broadly resilient, despite budget pressures in recent years. The household savings ratio has lifted recently, and it’s now hovering around pre-pandemic levels, which suggests there is still capacity to spend,’ Angala adds.
Bui points out that the employment market has remained strong and wages growth has been above 3%, which has also supported continued spending.
ANZ anticipates that household spending growth will slow to 1.7% by the end of 2026, compared with 2025, when spending lifted 2.5%.
As we watch the flow-through of rate hikes and inflation, the lipstick effect may come more into play in the coming months. It’s worth remembering that this won’t keep total consumption spending steady.
‘It is about a cutback in bigger purchases, so people may still be increasing their smaller purchases, but the result would still be a decline in total consumption or consumption per capita at the aggregate level,’ Bui says.
While the lipstick effect can be very broad, the sector beneficiaries tend to be the budget end of consumer discretionary, as well as healthcare and pharmaceuticals – think chemist brands of beauty and skincare. Consumer staples such as Coles and Woolworths may see an uptick in their premium home-brand lines, while Wesfarmers may benefit through its ownership of Kmart, where consumers can still treat themselves to new and on-trend homewares without the luxury price points.
Lottery sales also rise in tough economic times – a matter of hope.
It tends to be consumer discretionary stocks at the top price points that are hardest hit during recessions (and overlooked as part of the lipstick effect).
Once upon a time, items such as streaming services would have been the first to be dropped in tough times, but these have started to join the realm of affordable luxuries when compared with concerts and other entertainment.
It can be risky to invest purely in the hope that a company or sector will benefit from the lipstick effect, so focus on company fundamentals.
Look at company valuations and fundamentals, diversified revenue streams and solid balance sheets that can withstand economic cycles. A strong franchise is also important, particularly in an essential sector – people will keep buying, even at a higher price point, if it is a superior product or service and one they deem essential.
From a fund perspective, you could consider a tilt towards consumer staples through an ETF such as iShares Global Consumer Staples ETF (ASX: IXI). Otherwise, the lipstick effect is more a useful spending behaviour to be aware of within a diversified portfolio, including what it may mean for company earnings.
What Is the Lipstick Effect?
The lipstick effect is a spending pattern in which consumers choose smaller indulgences in place of more expensive options in tougher economic times, or trade down from one premium option to the next option they can afford.
Is It a Proven Economic Law?
The lipstick effect is an economic spending pattern that has been observed over many years, rather than a proven law. It was identified by economist Juliet Schor in her book The Overspent American: Why We Want What We Don’t Need, and the term was coined by Leonard Lauder in 2001 based on surging lipstick sales at Estée Lauder. Similar patterns were seen during the GFC and the COVID-19 pandemic.
Which Sectors Tend to Benefit?
Sectors that tend to benefit include consumer staples, healthcare and pharmaceuticals, and the lower-priced end of the consumer discretionary sector.
The fund aims to provide investors with the performance of the S&P Global 1200 Consumer Staples Sector IndexTM, before fees and expenses. The index is designed to measure the performance of global consumer staples companies and may include large-, mid- or small-capitalisation stocks.
Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
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