Cost of Living Drags Consumer Confidence Further Down

As the midwinter blues set in, consumer confidence in the region has continued to decline, with growing concerns over the rising cost of living. The ANZ-Roy Morgan Consumer Confidence Index dropped four points to 94.7 in the latest report, signaling that more households are turning pessimistic than optimistic about their financial future.

Anything below 100 points on the index indicates that pessimism outweighs optimism, and with the current reading, households are clearly feeling the pressure. Inflation expectations have risen to 5.1 percent, the highest since April 2023, even though headline inflation remains at a more moderate 2.7 percent. This discrepancy is largely due to the sharp increases in essential items like food, insurance, electricity, and council rates, which are rising at significantly higher rates than the overall inflation rate.

Sharon Zollner, ANZ's chief economist, explained that these rising costs are affecting consumer behavior. 'At this stage of the business cycle, inflation in necessities is crowding out discretionary spending,' she said. This has left the retail sector struggling, with fewer households feeling it's a good time to make major purchases. The proportion of households that believe now is a good time to buy a major household item has dropped to -8, a troubling sign for businesses reliant on consumer spending.

Despite the challenges, there are some signs of potential relief. More households are now benefiting from lower mortgage rates, and strong farmer incomes are providing a boost to rural communities. Zollner noted that while inflation remains a major concern for households, she expects conditions to ease by the end of the year.

The outlook for the retail sector remains bleak, however. With consumers prioritizing essentials over discretionary purchases, businesses are facing an uphill battle to regain momentum. This is particularly concerning as the economy enters a critical phase, where consumer spending plays a pivotal role in driving growth.

As the situation unfolds, the focus will be on whether policymakers can implement measures that provide immediate relief to households while also ensuring long-term economic stability. For now, the cost of living remains a dominant force shaping consumer sentiment across the region.