Australian Household Spending Tanks While Inflation Runs Hot

Real per capita falling across the board

Amidst a challenging backdrop of uncertainty related to the crisis in the Persian Gulf, still simmering domestic inflationary pressures and highly depressed consumer confidence, concerns over the future path of the Australian economy continue to build.

In May, RBA Assistant Governor Sarah Hunter gave a speech to the Bloomberg Forum for Investment Managers, during which she shared the RBA’s view that a much more serious economic downturn and deterioration of the labour market could be required to tame inflationary pressures.

“Moreover, if (inflation) expectations rise persistently, it becomes harder for the central bank to bring inflation back to target, as it must both bring expectations back down and restore the balance between supply and demand”.

“Doing so may require a more substantial slowing of economic activity, as we saw during the early 1990s recession (Graph 6 below). So it’s crucial for central banks to keep inflation expectations anchored around the inflation target.” Hunter said.

Looking at the latest per capita Household Spending Indicator data from the Commonwealth Bank, the consumer economy is beginning to slow dramatically.

In the face of recent rate rises, as well as high levels of uncertainty stemming from the crisis in the Middle East and the potential impact of the recent federal budget, this is hardly surprising.

But as the chart below which is adjusted into inflation adjusted per capita terms reveals, the deterioration in the spending of the nation’s households had begun before a shot was fired in the Persian Gulf.

In February, real per capita spending year on year contracted by 2.9% for outright home owners and by 2.1% for renters, with mortgage holders seeing their spending rise by 0.3%.

Brief side note: The temporary surge in spending in March was largely due to the dramatic increase in the cost of petrol and diesel stemming from the war in the Middle East.

[Please note the inflation figure for May 2026 used an estimate of 4.2% year on year, this is at the lower end of analyst forecasts currently available at the time of the writing of this article]

Since the war driven bump in consumption, per capita real spending has further deteriorated, with mortgage holders now seeing their spending declining.

Part of what makes the current combination of circumstances so concerning is that this deterioration in the fortunes of households does not necessarily mean that inflation will be tamed by the fall in per capita household consumption.

Between March 2022 and March 2025, per capita spending (ex-housing) fell in aggregate, with the falls entirely concentrated in the under 55 age demographic.

But despite households seeing the most significant and sustained hit to their non-housing consumption spending since at least the 1990s recession, this did not tame underlying inflationary pressures.

Since underlying inflation first exceeded the RBA’s 2-3% target band in the March quarter of 2022, the RBA’s preferred inflation metric, the trimmed mean, has had just two inflation reports under 3%.

The Takeaway

The data reveals a similar picture to the one that has emerged over much of the last four years, per capita spending growth at a granular level is weak and inflation remains deeply problematic.

Despite the sacrifices households are making to their consumption, both through inflation eating away at their purchasing power and through higher rates, a combination of still historically high migration, near zero productivity growth and strong levels of government spending growth are playing major roles in ensuring that inflation remains a continuing issue.

From a political perspective this is fertile ground for a continuing expansion of the growing discontent seen in various polls, which is driving the fragmentation of the landscape of federal politics.

Ultimately, the current set of challenging circumstances are heavily driven by decades of failed policy settings from both sides of Australian federal politics, pursuing settings that hollowed out the economy and relied upon a strategy that temporarily boosts headline growth at the expense of growth in long term living standards.

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