Households may be becoming more careful with their money, but weaker consumer spending alone has not been enough to bring inflation comfortably under control. CommBank analysis shows that price pressures remain embedded across several important parts of the economy, helping explain why inflation continues to present a challenge despite consumers adjusting their spending behaviour.
Annual inflation eased to 3.5% in July, according to the CommBank analysis, while underlying inflation remained slightly higher at 3.6%. Both figures demonstrate that inflation has moderated from previous peaks, but underlying inflation remains well above the Reserve Bank’s target and continues to complicate the outlook for interest rates, households and the wider economy.
Housing is one of the major contributors. Housing-related costs increased by 5% over the year, significantly exceeding the broader annual inflation rate. Within that category, new dwelling construction costs rose by 5.7%, while rents increased by 3.6%. Those increases affect households differently, but collectively they demonstrate how housing costs can keep overall inflation elevated even when discretionary spending becomes more subdued.
Construction costs are particularly important because they affect more than people currently building a home. Higher costs for labour, materials and project delivery can influence the economics of future housing developments. When it becomes more expensive to produce new dwellings, developers and builders face greater pressure on margins, while purchasers may ultimately encounter higher prices.
Rental growth adds another layer. A 3.6% annual increase in rents means tenants continue to face higher housing expenses at the same time as other essential living costs remain elevated. Because rent represents a substantial component of household budgets, continued increases can make the experience of inflation feel considerably stronger than the headline figure might suggest.
Domestic consumer demand is also only one part of the inflation equation. Global energy costs continue to influence prices, while weak productivity is making it more difficult for the economy to absorb higher wages and other costs without those pressures flowing through to prices.
Strong competition for workers and materials is another factor. Government activity, private business investment and major infrastructure projects can all draw on the same pools of labour, equipment and construction materials. When several sectors are competing for limited resources simultaneously, prices can remain elevated even as individual households reduce discretionary purchases.
This helps explain the apparent contradiction between cautious consumers and persistent inflation. A household may postpone buying furniture, reduce restaurant spending or delay another discretionary purchase, but those decisions do not immediately reduce the cost of constructing a dwelling, delivering an infrastructure project or securing skilled labour.
Spending patterns also differ significantly by age. CommBank data shows expenditure among Australians aged 65 and over increased by 10.1% annually in June. By comparison, spending among people aged 25 to 34 increased by only 4.2%. The gap demonstrates that the effects of current economic conditions are not being distributed evenly across generations.
Younger households can be particularly exposed to housing costs because many are renting, servicing relatively recent mortgages or trying to accumulate deposits. Older households, meanwhile, can have very different financial circumstances, including lower housing debt or greater accumulated assets. Those differences can produce substantially different spending responses even when everyone is facing the same headline inflation environment.
For the Reserve Bank, this uneven picture makes monetary policy particularly difficult. Interest rates operate broadly across the economy, but their impact differs depending on household debt, income, savings and housing circumstances. Mortgage holders with large variable-rate loans can experience changes in monetary policy much more directly than households without debt.
RBA Deputy Governor Andrew Hauser acknowledged the public frustration surrounding persistent price increases, saying: “People want inflation down. People are furious about inflation.”
The challenge is that bringing inflation down quickly can carry economic costs. Higher interest rates can reduce borrowing, investment and household spending, but excessive weakness can also place employment and economic growth under pressure. The RBA therefore has to weigh the pace of disinflation against the risk of unnecessarily damaging other parts of the economy.
Housing makes that balancing act more complicated. Higher borrowing costs can weaken demand for property, but they do not automatically solve shortages of housing or reduce the underlying cost of building new dwellings. In some circumstances, financing costs can themselves make construction projects harder to deliver.
The July figures therefore show why the inflation outlook cannot be understood solely by looking at household shopping behaviour. Housing costs, rents, construction expenses, global energy markets, productivity and competition for labour and materials all contribute.
While consumers may already be responding to economic pressure by becoming more cautious, inflation will depend on a broader range of forces continuing to moderate. Until those pressures ease more consistently, the Reserve Bank faces the difficult task of pursuing lower inflation while attempting to preserve employment and sustainable economic growth.
