Household resilience tested with cost pressures building in the wake of Iran shock

Australian households are still spending money, but their financial resilience and buffers built up over years are coming under increasing pressure as higher costs and global uncertainty weigh on confidence and budgets.

Speaking on the latest episode of the CommBank View: Economics and Markets podcast, CommBank Senior Economist Ashwin Clarke said the Iran conflict has added to pressures that had already been expected to slow consumer spending.

“The Iran war has been a really big shock to the consumer,” Clarke said. “But even before that, we were expecting household spending to ease as the drivers of strong income growth in 2025 began to reverse.”

Spending outlook was already softening before Iran shock

Even before the escalation in the Middle East, the outlook for consumers had begun to soften.

The key drivers that supported income growth in 2025 were reversing, with interest rates rising, inflation picking up again in the second half of the year and the impact of tax cuts fading.

“We were expecting wage growth to slow,” Clarke said. “So household spending was already expected to ease.”

But the Iran conflict has added a new layer of pressure, primarily through higher oil prices.

“In Australia, higher oil prices almost immediately flow through to petrol and diesel prices,” Clarke said. “That’s one of the first ways households feel the impact.”

While fuel costs have eased slightly in recent weeks due to a temporary cut to fuel excise and some moderation in oil prices, the broader impact remains.

Confidence weakens as costs rise, but buffers provide support

Higher fuel prices are also weighing on household sentiment. “There’s a reasonable historical relationship between petrol prices and how households feel about their finances and the economy,” Clarke said.

Yet despite the growing pressures, households continue to hold substantial financial buffers. Savings rates remain above pre-pandemic levels, mortgage offset balances have risen to around 20 per cent of income, and household cash and deposit holdings have increased significantly.

“Households have fairly solid buffers and the capacity to smooth through negative income shocks, at least initially,” he said, referring to the ability of households to draw on financial reserves to help ‘smooth out’ ups and downs in the economy.

However, Clarke noted that uncertainty itself may influence behaviour and see consumers cut back on spending, rather than dip into their buffers.

“It’s not always the case that households use those buffers,” he said. “In periods like the global financial crisis, people tended to cut back spending instead to preserve a safety net.”

Early signs of softer spending as the labour market looks to cool

Commonwealth Bank’s own near real-time transaction data suggests consumer spending has remained relatively resilient so far, even after the geopolitical shock of the Iran conflict. However, some early signs of softness are emerging.

“Overall spending has been pretty solid compared to the same period last year, even when you exclude petrol,” Clarke said.

“We are seeing some early signs of softness, particularly in travel and eating out, but it’s too early to say whether that will be sustained,” he said.

Rising costs are also expected to flow through to businesses, which may face both higher input costs and weaker demand for their products.

“They’re going to face higher costs that they can’t always pass on, and likely lower demand from households,” he said. “That means less capacity to hire and invest.”

“In an ideal scenario, jobs are still growing, just more slowly than the labour force,” he said. “That means some people may find it harder to get a job, rather than large numbers losing work.”

An increasingly cautious outlook

Overall, while households remain in a relatively strong financial position, the balance of risks has shifted, Clarke said.

“Households have been resilient so far,” he said. “But with higher interest rates, weaker confidence and global uncertainty, we do expect spending to moderate.”

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