Household spending rose 0.6% in September and was 6.8% higher than a year earlier, according to the Australian Bureau of Statistics (ABS) monthly household spending indicator.
The result was “materially stronger than both we and the market expected”, Commonwealth Bank Senior Economist Ashwin Clarke said in a research note.
CommBank had forecast no change for the month, while the market had tipped a 0.2% rise.
The figures were released a day after the Reserve Bank of Australia (RBA) raised the cash rate by 0.25 percentage points to 4.85%, its fifth increase this year and the highest cash rate since 2008. CommBank economists expect the RBA to remain on hold following the November increase, although persistent inflation means another increase next year cannot be ruled out.
What drove the spending increase?
Spending on essentials rose 1.2% in September, well ahead of a 0.3% rise in discretionary spending.
Higher fuel prices pushed up spending on transport, Clarke said.
Health spending also rose. The ABS linked the increase to more visits to GPs, dentists and optometrists, and more spending on pharmacy goods and toiletries, partly because of late flu activity in September.
Are households still paying for experiences?
Despite higher spending on essentials, Clarke said there were “still signs households are willing to spend on discretionary items in the face of budgetary pressures”.
Discretionary spending is up 6.9% on a year ago, helped by air and sea travel, recreation and culture.
“Households still appear to be prioritising experiences,” Clarke said, pointing to spending on performing arts and live entertainment. Electronics and gambling also added to the category.
Household goods were weaker. Spending on furniture and household equipment dipped 0.2% in the month, while clothing and footwear barely moved.
“This though could be because households were waiting for Black Friday sales,” he said.
By state, the Northern Territory, Western Australia and Tasmania recorded the strongest annual growth, while NSW and the ACT grew the least.
What does stronger spending mean for interest rates?
Strong spending matters for borrowers because it can keep pressure on rates, Clarke said.
The latest figures take on added significance after this week’s RBA decision. The central bank lifted the cash rate to 4.85% on Tuesday as it continues to try to bring inflation sustainably back towards its 2% to 3% target.
Clarke said the September spending result was unlikely to be a big surprise for the RBA, given solid data earlier in the quarter.
But he said “the RBA is on edge about inflationary pressures”, and continued strong spending would add to the case for further rate rises early next year.
For now, CommBank still expects the RBA to keep rates on hold at its December meeting and beyond.
Why is spending still expected to slow?
Clarke said the full hit from this year’s rate rises hasn’t landed yet.
“Households are only starting to face higher mortgage payments from the September rate rise,” he said. It will also take several weeks for the November rate rise to pass through.
Cost of living pressures are growing too, particularly from higher fuel costs, he said.
CommBank’s latest economic forecasts expect annual household spending growth to slow to 0.7% by mid-2027 as higher rates, inflation and a softer labour market weigh on household budgets.
Households tend to take time to cut back when budgets come under pressure, and CommBank still expects spending to slow from here.
“A slowing in spending growth from here is what is needed for the economy to return to a more sustainable footing,” Clarke said.
But he warned “the risks are still high that household spending does not slow”.
