Australian spending rise bolsters case for RBA hike

Australian household spending rose 1.1% in July, according to CreditorWatch's analysis of the latest figures, beating economists' expectations for the third straight month.

CreditorWatch Chief Economist Ivan Colhoun said the stronger result did not simply point to a healthier consumer sector, because it was driven partly by rising prices and temporary spending linked to the Women's World Cup. He said the spending figures, combined with the latest inflation data, had strengthened the case for the Reserve Bank of Australia to raise interest rates at its September meeting.

The July increase was broad-based. Food spending rose 1% month on month, hotels, cafes and restaurants increased 1.1%, recreation and culture climbed 1.5%, health spending rose 1.2% and fuel spending increased 2.2%.

The analysis suggested the rise in household spending reflected a mix of higher volumes and higher prices. Excluding transport, which removes much of the recent fuel volatility, spending still increased 1.2% in the month.

Some of the pressure came from categories where costs have been rising more quickly. Colhoun pointed to food and hospitality, where price increases were particularly visible, echoing the latest consumer price index reading.

He also linked the pattern to wage costs, arguing that businesses in labour-intensive sectors were absorbing the effect of the 4.8% rise in minimum and award wages that took effect on 1 July. In his view, those changes are now feeding through to consumer prices.

Inflation pressure

The spending figures were released just after the July CPI reading, which Colhoun said showed inflation was still running too strongly. He argued that the central bank's concern about upside inflation risks had shifted from a warning to a present problem.

"Yesterday's July CPI confirmed the RBA is dealing not with upside inflation risks but with upside inflation reality. With inflation having been above the target for such a significant period of time, the Board will have to react by raising interest rates further at its September Board meeting or lose further credibility if it does not react," said Ivan Colhoun, Chief Economist, CreditorWatch.

That view casts the household spending data in a different light than a straightforward sign of consumer resilience. A solid nominal increase can reflect households paying more for everyday goods and services rather than buying materially more of them.

Temporary factors also complicated the picture. Gambling and catering services contributed to gains in recreation and culture and in hospitality-related categories, which Colhoun said probably reflected the World Cup and may reverse the following month.

Fuel was another factor. Spending rose after part of the reduction in fuel excise ended on 1 July, with the remaining change occurring in early August and likely to lift fuel spending again.

Sector divide

Beyond the immediate rates debate, Colhoun said the broader economy was becoming more uneven across industries. He expects higher borrowing costs and elevated oil prices to add pressure in some parts of the economy while others remain supported by investment trends.

"The economic circumstances continue to lead to greater diversity in performance across sectors, which a further increase in interest rates will likely amplify. A number of sectors benefit from the strength in AI, defence and renewables investment (including Mining and parts of Construction), while others will be further pressured by higher interest rates and oil prices, while the latter remain elevated. Thankfully, the unemployment rate remains very low," said Colhoun.

The comments underline a growing split in the Australian economy. Industries tied to major capital spending themes such as artificial intelligence, defence and the energy transition may continue to see stronger demand, while more rate-sensitive sectors face tighter conditions as financing costs rise.

For policymakers, the figures add to the difficulty of judging whether consumer demand is cooling enough to bring inflation back into the target range. Monthly nominal spending data can be distorted by one-off events and price shifts, making the underlying trend in household consumption harder to read.

Colhoun said that made it harder to draw firm conclusions about the relative strength of spending categories from the July numbers alone. A clearer breakdown between prices and volumes, he said, would have to wait for the quarterly data.

"Today's data point reaffirms that the RBA Board is likely to tighten Australian monetary policy further at its September Board meeting as the Board can no longer be confident that inflation will return to target by late 2027 as the staff forecasts suggest," said Colhoun.