Consumer pessimism shows inflation fight is not yet won

The gloom hanging over the Australian consumer shows little sign of lifting.

The Westpac Melbourne Institute consumer sentiment index declined 2.4 per cent in April to 82.4, from 84.4 in March. That’s in line with the average seen over the last two years in what is proving to be one of the bleakest periods for sentiment since the survey began in the mid-1970s. 

April’s findings were particularly discouraging after previous months had shown hints of the start of a recovery. The latest setback is a reminder that inflationary pressures continue to bear down on households, with consumer price rises having outstripped wage growth by 6 percentage points over the last three years.  
 

There were some minor positives to take out of the latest report. 

Views on family finances over the next year were slightly more upbeat, perhaps in anticipation of Stage 3 tax cuts which will kick in from July. 

Responses around the labour market were also positive, with people feeling comfortable about job security and their future prospects. 

But it’s clear that cost of living pressures, higher interest rates and an increased tax burden are still taking a toll.

The sub-index which asks respondents whether now is a good time to buy a household item dropped by nearly 7 per cent, while views on broader economic conditions also showed a deterioration. 

Many people are yet to be convinced that interest rates have peaked, with over 40 per cent of respondents still expecting mortgage rates to move higher over the next 12 months.  

For Australia, the inflation fight has been a bit longer and harder than other countries. If we look at comparable measures in the U.S., the UK and Europe on a like-for-like basis they are consistent with sentiment rates in the 90 to 95 range, compared to Australia's in the low 80s.

The inflation story is somewhat more advanced in those countries, with the Federal Reserve in particular having opened the door to potential interest rate cuts. 

We haven't had the same sort of messaging in Australia yet, although we may see a shift around that over the next few months. 

Westpac economists expect that that March quarter inflation report, due on April 24, will bring a more decisive move in headline inflation down to around 3.5 per cent. If that plays out, it should give the RBA more confidence around achieving its 2 to 3 per cent target in 2025. 

We may then get a clearer signal that further rate hikes are not likely, they may even open the door for rate cuts, although we expect them to tread cautiously around that. 

We also have the Federal Budget coming up in May, which could offer more cost-of-living support measures. Add the July tax cuts into the mix and there still looks to be a reasonable prospect of a recovery in sentiment in the next few months. 

But right here, right now, we're stuck at the bottom of the cycle and confidence remains downbeat.

To read Matt’s full report, visit WestpacIQ.