Strong household spending heaps more pressure on RBA

Following Wednesday’s stronger-than-expected trimmed-mean inflation by the Australian Bureau of Statistics (ABS), which led several major banks to forecast imminent interest rate hikes, the ABS on Thursday reported strong household spending in July.

Household spending rose by 1.1% in July to be 7.0% higher year-over-year, the strongest annual spending growth since June 2023. Both discretionary and non-discretionary spending rose.

The following charts from Alex Joiner at IFM Investors summarise the situation:

Joiner was blunt in his assessment on X (Twitter), noting that household spending in July was the “strongest annual growth rate in this new series outside the pandemic stimulus years”.

“If there’s a wealth effect from lower dwelling prices then we are not seeing yet”, added Joiner. “These data suggest that the RBA can for now put this concern around wealth effects aside in its deliberations around where monetary policy settings should be. The case for a rate increase this year is building”.

“These data combined with yesterday’s inflation numbers suggest that the RBA will need to hike rates again”, Joiner wrote. “The timing is uncertain; September is clearly live but would be an admission that the August outlook is so challenged that policy action was needed”.

“November is also a prospect that the Bank may be more comfortable with. Whatever it is, another move by the end of the year seems warranted. It will be interesting to see whether the national accounts convey a similar message”, Joiner concluded.

Thus, the stars are aligning for another rate hike, which will add further downward pressure on home prices.