Retail spending jumps in July, despite cost of living pressures

Australians spent more in department stores and on clothing and shoes in July, in a result that will likely encourage the RBA to continue aggressively hiking rates.

Retail spending jumped in July as Australians spent more in shops and cafes despite a national cost of living “crisis” and the looming hit to indebted households from ­rapidly rising interest rates.

New figures from the Australian Bureau of Statistics show retail sales snapped a three-month deceleration to lift by 1.3 per cent last month to $34.7bn, or 17 per cent higher than a year earlier.

It came as the sharemarket tanked on Monday after US Federal Reserve chairman Jerome Powell said he was prepared to dramatically slow the world’s biggest economy to tame runaway inflation, and economists said the latest sign of household resilience firmed up expectations that the Reserve Bank would continue to aggressively lift interest rates.

Analysts predicted a further 0.5 percentage point increase in the cash rate to 2.35 per cent at next Tuesday’s RBA board meeting, while investors pencilled in an additional 0.25 percentage point hike this year, which would leave rates at 3.35 per cent by December.

The seasonally adjusted retail turnover figures from the ABS reveal the unexpectedly strong result – economists had expected only a modest 0.3 per cent increase – was led by a 3.8 per cent surge in department store sales, and a solid 3.3 per cent rise in spending on clothing, footwear and personal accessories.

Households’ $250bn cash buffers accumulated through the pandemic and the fact RBA rate hikes were yet to flow through to higher mortgage repayments explained the persistent strength in retail trade, economists said – a strength that would be tested over coming months.

CBA senior economist Belinda Allen said that at CBA there was, on average, a three-month delay between an RBA rate rise and the higher repayment being deducted from a customer’s bank account.

 

“Between August and December, this interest rate impact quadruples based on the already announced policy changes. This impact will lift again depending on what the RBA does to the cash rate in September and beyond,” Ms Allen said.

She said this delayed cashflow impact also helped explain the wide disconnect between the robust spending data and very weak consumer sentiment.

ANZ senior economist Adelaide Timbrell said spending by ANZ customers showed “slightly slower momentum in spending in August compared to ‘normal’ seasonal variation, but we are far from observing a cliff in spending yet”. She said it was possible the unanticipated strength in retail spending in July was driven by a big increase in net overseas arrivals in the month.

Citi chief economist Josh Williamson said “unseasonably wet and cold weather along Australia’s east coast” would have contributed to the big lift in clothing and footwear spending.

With a range of pressures on household budgets and evidence of accelerating consumer price inflation, Mr Williamson said higher prices – rather than higher volumes – explained the big monthly increase in retail turnover.

“The RBA will not want to see ongoing high price appreciation driving nominal retail activity and will most likely add another (half a percentage point) to the official cash rate next Tuesday,” he said.

The ABS figures show Australians lifted spending in cafes and restaurants by 1.8 per cent in July, extending a strong run in 2022 as the hospitality sector treads its long path back to a pre-pandemic semblance of normalcy.

Food retailing was up 1.2 per cent in the month.

By state, Victoria and the ACT recorded the largest monthly lift in retail sales – up 1.8 per cent – while NSW spending increased 1.3 per cent. In Queensland, the increase was only 0.4 per cent, while retail spending dropped by 0.3 per cent in Tasmania.