Cookies crumble as interest rates bite into household budgets

The battle to bring down inflation while keeping the economy afloat is being fought out in the supermarket biscuit aisle, one Scotch Finger at a time.

The national accounts, which show an economy on the life support of government spending, reveal how cash-strapped households are dealing with high inflation and the Reserve Bank’s high interest rate setting.

The inflation battle is being fought over the nation’s biscuit tins.Credit: Louise Kennerley

Overall household spending dropped by 0.2 per cent in the quarter. From hotels and cafes (spending down by 1.5 per cent) to clothing and footwear (down 1.6 per cent), households cut the amount of stuff they bought.

According to the Bureau of Statistics, spending on discretionary goods and services – the things we like but don’t necessarily need – tumbled by 1.1 per cent.

Food is not discretionary. But Australians reduced food consumption, bought through the nation’s network of supermarkets and corner shops, by more than $200 million.

They did this, in part, by shifting to cheaper versions of things. The major supermarkets have been picking up this shift for a while, as consumers weigh up the relative value of an Arnott’s Scotch Finger against the cheaper home-brand version of the delightful snack.

The volume of food bought by households in the June quarter was actually slightly lower than in March 2020, when we rushed into the stores to stock up on pasta and canned tuna.

But it’s not just important biscuits where people are winding back. The amount of alcohol bought by households is at its lowest point since the June quarter of 2021. Clothing and footwear is back to its March 2022 level. New cars are back to June last year, while spending through hotels and cafes is back to that of March 2023.

Outside of COVID, the last time household consumption fell by so much was in December 2008, when the country was getting hit by the start of the global financial crisis (and the Reserve Bank was in the process of cutting official interest rates from 7.25 per cent to 3 per cent).

Those cheap biscuits are the price consumers are paying for the Reserve Bank’s efforts to tame inflation.

The result itself would have come as a surprise to the RBA. For all the confected outrage over Jim Chalmers and his commentary about the RBA’s rate settings, these figures confirm the bank’s economic forecasts are in trouble.

It had expected household consumption to have grown by 1.1 per cent over the past 12 months. Instead, the data showed it grew by just 0.5 per cent.

Given household spending is about 55 per cent of the economy, missing the forecast by that much is a real issue.

It had also forecast the household savings ratio to be about 1.2 per cent. It was half that, in another sign that the RBA is struggling to get a grip on how households are dealing with current rate settings.

Going forward, what matters most is how households deal with the stage 3 tax cuts and welter of government cost-of-living handouts which started landing in bank accounts in July.

The early signs are that we haven’t gone on a deluxe Tim Tam spending spree just yet. Much of that extra cash, so far, is being saved rather than spent.

If that continues to hold through the September quarter, then economic growth could slow even further.

Credit: Matt Golding

The September quarter results will be released on December 4. Five days later, the Reserve Bank board will start its last meeting of the year.

Financial markets put the chance of an interest rate cut at that meeting at about four in five.

If the board members have to share a pack of Aldi digestives at the meeting, we will know that even the Reserve Bank realises interest rates will soon have to fall.

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