Australians cutting back on non-essentials as cost of living crunch continues

Aussies are cutting back on holiday plans, eating out and coffees as the cost of living crunch continues.

Australians are cutting back on coffees and holidays as they grow accustomed to the ongoing cost of living crunch and are making deliberate spending trade-offs, new research from NAB shows.

Released on Friday, fresh consumer sentiment data shows that while Australians are less stressed about inflation than they were three months ago, ongoing price pressures continues to weigh heavily on many Australians.

However, consumers have been able to adapt to higher prices because of the availability of jobs, the report says, warning that if unemployment was to rise sharply, up from its currently level of 3.6 per cent, spending could quickly fall.

With consumers expecting the cost of necessities to rise, they are sacrificing spending on non-essentials. Picture: NCA NewsWire / Paul Jeffers

According to the NAB report, consumers expect that paying for necessities, including groceries, rents, mortgage repayments, transport costs and utilities, will take up a greater proportion of household incomes, and are consequently sacrificing spending on major purchases.

Recent inflation data released for the year to August shows that while prices growth has broadly fallen from its peak of 7.8 per cent in December, it still remains elevated at 5.2 per cent.

Services inflation – which measures price pressures for items including housing and energy, and across labour-intensive sectors like hospitality and hairdressing – remains sticky.

In response, four in 10 Australian consumers made more modest holidays plans, while around one in three cancelled or delayed a major household purchase such as a TV or washing machines, the report found.

Australians are downsizing their holiday plans, the NAB data shows. Picture NCA NewsWire / Aaron Francis

55 per cent of consumers are also cutting back on eating out at restaurants, 50 per cent bought fewer coffees, snacks and lunches, while 47 per cent reduced spending on trips to shows and movies.

Asked if inflation would abate in the future, 67 per cent of consumers expect higher prices in 12 months time.

RBA warns on inflationary expectations

The Reserve Bank is wary of consumers’ inflationary expectations, noting that if households believe persistent price pressures are here to stay they will continue to spend, meaning rates may have to stay higher for longer.

Speaking earlier this week, new RBA governor Michele Bullock warned that ongoing geopolitical shocks, including Hamas’ bloody incursion in Israel, risked entrenching inflation and inflationary expectations.

Entrenched inflationary expectations risk seeing could force the RBA to resume its punishing round of rate increases. Photo by: NCA Newswire / Gaye Gerard

“The problem is that we've just got shock, after shock, after shock,” governor Bullock said.

“And the more that that keeps inflation elevated, even if it‘s from supply shocks, the more people adjust their thinking.

“And the more people adjust their inflation expectations, the more entrenched inflation is likely to become.”

If expectations that inflation would stay high over the long term, Ms Bullock warned that the central bank would be forced to resume its aggressive round of monetary tightening.

“The longer inflation stays above target and the more people observe it happening in their day-to-day lives, the harder it will be,” she said.

Originally published as Australians cutting back on non-essentials as cost of living crunch continues