The latest retail spending figures show that households continue to do it tough and that theReserve Bank of Australiawas wrong when it chose to keep rates steady in April.
Back in the first week of the election campaign,if you recall, the Reserve Bank monetary policy board met and decided to do nothing. Things were confusing, things were uncertain. Better to do nothing. Also, there was an election on – best not to look political – play it safe.
After that meeting the market predicted there would most likely be a rate cut at the next meeting on 20 May and probably three cuts by the end of the year.
Now the market fully expects at least one rate cut in two weeks’ time with a 56% chance of a 50 basis point cut to 3.6%. It also has fully priced in four rate cuts by the end of the year:
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What has happened between now and then is Donald Trump decided to upend world trade, and theAustralian economyis less buoyant than the RBA hoped it was when it did nothing in April.
In April, the board noted that household spending had picked up at the end of 2024.
This was not, theRBA argued, just people searching for sales and taking advantage of discounts. Instead, it believed “the pick-up in spending growth among components not affected by sales events suggested there had been a genuine improvement in underlying momentum”.
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The bank then noted that “more recent indicators signalled that some of this pick-up had been sustained”.
Well, I would love to know what those indicators were, because last Friday, while everyone was focused on the election, the Australian Bureau of Statistics releasedthe quarterly retail trade figures.
And they stunk.
In the March quarter, the growth in the volume of things Australians bought in shops was flat. Once you took into account population growth, it fell:
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The 0.8% “pick-up” in the last three months of 2024 was not a sign of “genuine improvement” but actually a sign that consumers were taking advantage of sales.
When you remove food purchases, retail spending in March fell 0.2%. Over the past year non-food spending rose 2.2%, which might sound better, but before the pandemic such spending grew on average 3.2%.
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No, spending is not picking up. We are not seeing a surge in demand that might put pressure on inflation. But it was good of the Reserve Bank to make mortgage holders wait another six weeks for a rate cut just to be sure.
When you look at actual spending, and how much we are buying compared to what we were before the pandemic, it’s pretty clear there is not a lot of demand in the retail sector.
In the December quarter of last year, the volume of retail spending was 2.6% below the expected level, given the pre-pandemic trend. By the March quarter it was 3.1% behind.
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And the RBA’s inaction was cruel because when it comes to cost of living, interest rates are the major issue.
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On Wednesday the ABS released the latestcost-of-living indexes. These are essentially the inflation for various household types, but crucially unlike the official consumer price index measure of inflation, they include the cost of mortgage repayments.
This, as you can image, has a sizeable impact, given what has happened over the past three years:
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Mortgage interest charges have gone up on average 163% for employee households (the households most likely to have a mortgage) since March 2022. That is why in that time the cost of living for employee households has risen 20.7% compared to official inflation going up 13.6%.
And you might think that because the RBA cut interest rates in February, we should be seeing mortgage interest charges come down. Well, no – interest charges rose 1.5% in the March quarter despite the cut.
That’s because it takes time for the rate cuts to flow through to actual reductions in what you are paying:
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This is another reason why the RBA should have cut rates in April – the impact on households and the economy is not instant.
The March quarter retail figures showed that households needed help then; instead, the RBA decided to wait until May to deliver help that will only arrive some months after that.
And if you do feel like your mortgage repayments have become a huge burden, you are not alone.
So large have been the impact of mortgage rate increases since March 2022 that they alone account for just under half of the entire increase in cost of living for employee households:
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Of course, this is just an average – it is an estimate for all employee households – including those who don’t have a mortgage. So, the true impact is much larger for those who do have one. It means to reduce the impact of cost of living the biggest thing needed is more rate cuts.
But I guess it is just as well the RBA did not cut rates in April. That might have been seen as political. It might have given the ALP too great of an advantage and led to them winning the election in a landslide. Best to be safe and wait and let households suffer in the meantime.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work