Household spending up but only due to higher prices

The CommBank Household Spending Intentions Index rose just under 1 per cent in October, with the data revealing that people are spending more on household services, retail, and entertainment, but the numbers also revealed that half the gain in retail spending was driven by higher food spending and price increases on supermarket shelves.

Spending actually declined in half of the index’s 12 underlying categories and the annual rate of spending growth in October halved to 7.4 per cent from 14.1 per cent in September.

The largest declines for October were in home buying (-3.1 per cent) and travel (-2.4 per cent), with the Reserve Bank of Australia’s (RBA) seven consecutive monthly interest rate hikes seeing home buying spending intentions fall 27.3 per cent year-on-year and pent-up post-COVID-19 travel demand cooling.

Commonwealth Bank of Australia (CBA) chief economist Stephen Halmarick said increased household spending in October reflected higher prices and seasonality, with discretionary spending continuing to weaken in response to increased interest rates.

“However, this marginal increase in spending was narrowly based and focused on the household services, retail and entertainment sectors. Cost of living pressures saw many spending categories continue to weaken and there was a marked decline in total spending growth from September,” he said.

The CommBank data is supported by the Westpac Melbourne Institute Consumer Sentiment Index that fell by 6.9 per cent in October and showed that sentiment continued to plumb historic lows.

The index is now below the low point of the GFC and only slightly higher than when the COVID pandemic first hit in April 2020.

The next lowest index rating was in 1990s when Australia was in the grip of a deep recession.

The latest sentiment decline followed Australian Bureau of Statistics figures showing inflation surged from 6.1 per cent in June to 7.3 per cent in September, with official forecasts for inflation to go even higher by the end of 2022 and to remain relatively high through 2023. The Westpac data showed that many consumers said the October budget has worsened their financial outlook and more consumers expect substantial follow-on rate rises.

The November surveys included an additional question about Christmas spending intentions, asking consumers whether they plan to spend less, the same, or more on gifts than last year.

Not surprisingly, Christmas spending plans are very subdued this year. Nearly 40 per cent of consumers expect to spend less on gifts this year, the highest proportion planning cutbacks since Westpac started asking the question in 2009.

The Australian Bureau of Statistics report noted that household spending continued to rise in September, increasing by 28.0 per cent compared to the same time last year.

Jacqui Vitas, ABS head of macro-economic statistics, said September 2022 saw the 19th consecutive month of increases through the year in total household spending, with increases in all spending categories. 

“There continued to be strong increases coming off the back of last year’s COVID-19 Delta lockdowns. Spending in Clothing and footwear (up 73.1 per cent), Hotels, cafes and restaurants (up 60.6 per cent), and Transport (up 53.0 per cent) all saw strong increases due to reduced spending from lockdowns in these categories,” she said.

In contrast, spending categories not as impacted by the lockdowns, such as alcoholic beverages and tobacco (up 4.0 per cent) and food (up 3.3 per cent) saw only small rises compared with September 2021.