Consumer confidence lifts, but retail headwinds remain

Consumer sentiment improved for a second consecutive month in August, with the Westpac-Melbourne Institute Index increasing 6.0% to 88.9. While confidence has recovered from the extreme lows recorded earlier in the year, sentiment remains firmly pessimistic and below the levels seen a year ago. The improvement provides some relief, but does not yet point to a meaningful change in the outlook for discretionary spending.

For retailers, this suggests a sustained period of challenging trading conditions. Consumers remain highly sensitive to interest rates and cost-of-living pressures and are therefore increasingly deliberate about when and where they spend. Major promotional periods continue to stimulate demand, but consumers have become increasingly conditioned to sales and willing to defer discretionary purchases in search of greater value. This creates a difficult dynamic for retailers, with discounting required to drive volumes at the same time as operating costs continue to place pressure on margins.

Retailers may look to bring forward promotional activity to stimulate demand, manage inventory and convert stock into cash. However, with consumers becoming more sophisticated in how they seek value, broad-based discounting alone is unlikely to be enough. Retailers will need to remain closely connected to their customers through more targeted and personalised offers, using an understanding of previous purchasing behaviour to provide relevant value and capture a greater share of constrained discretionary spending.

The most recent ABS Household Spending Indicator increased 0.8% in June 2026 and sales in the twelve months to 30 June 2026 increased by 5.4%. Inflation was 3.8% for the year to 30 June 2026.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

According to the Westpac-Melbourne Institute survey, consumer sentiment increased by 6.0% from 83.9 in July 2026 to 88.9 in August 2026, representing a second consecutive monthly improvement and a recovery from the extreme lows recorded in April and June. Despite the improvement, sentiment remains firmly in pessimistic territory and 9.7% below August 2025, with pessimists continuing to outnumber optimists, particularly in relation to their current financial position.

The August improvement was concentrated among mortgage holders and largely occurred following the RBA’s decision to leave the cash rate unchanged. While the decision appears to have provided some relief to households following three interest rate increases earlier in the year, 59% of consumers still expect mortgage rates to increase over the next 12 months.

The component indices all improved in August, although they all remain below their long-run averages:

• ‘family finances vs a year ago’ up 12.6% to 80.0;

• ‘family finances next 12 months’ up 1.8% to 98.2;

• ‘economic conditions next 12 months’ up 5.8% to 82.8;

• ‘economic conditions next 5 years’ up 3.2% to 89.8; and

• ‘time to buy a major household item’ up 8.1% to 93.8.

The strongest improvement was in consumers’ assessment of their current finances, with the ‘family finances vs a year ago’ sub-index increasing 12.6% to 80.0. This suggests some easing in the cost-of-living pressures that weighed heavily on consumers earlier in the year, although the reading remains at a historically weak level. Forward looking expectations for family finances also improved to 98.2, bringing optimists and pessimists broadly into balance.

Separate to the broad sentiment index (and the component indices) discussed above, housing-related sentiment also improved, with the ‘time to buy a dwelling’ index increasing 12.1% to 95.7, its highest level since November 2025. At the same time, the House Price Expectations Index fell a further 6.1% to 110.8, representing a fresh three-year low and suggesting consumers are increasingly expecting softer residential property prices.

The August result provides some signs that the significant deterioration in consumer confidence earlier in 2026 may be easing. However, the improvement appears to reflect relief around the RBA holding interest rates and some moderation in earlier cost-of-living concerns, rather than a material improvement in underlying household conditions. With sentiment remaining well below neutral and consumers still cautious around major purchases, retailers are likely to continue facing a value-conscious consumer in the near future.

Source: Australian Bureau of Statistics

The most recent ABS Household Spending Indicator (ABS HSI) recorded a 0.8% increase (seasonally adjusted) in June 2026, furthering the 1.2% increase recorded in May. The June result was 6% higher than June 2025. The increase compared to May 2026 was largely attributable to increases in transport spending, with vehicle purchases and air passenger and sea transport leading the rise. Headline inflation stood at 3.8% in June 2026, down from 4.0% in the twelve months to May 2026.

Household spending by sub-category mostly increased in the month:

• ‘Transport’ up 3.0%

• ‘Recreation and culture’ up 1.4%

• ‘Alcoholic beverages and tobacco’ up 1.0%

• ‘Furnishings and household equipment’ up 0.6%

• ‘Food’ up 0.3%

• ‘Health’ up 0.3%

• ‘Hotels, cafes and restaurants’ down 0.1%

• ‘Miscellaneous goods and services’ down 0.6%

• ‘Clothing and footwear’ down 0.7%

The increase in June 2026 was driven primarily by ‘transport’ (+3.0%), with an increase in purchase of vehicles, and increased spend on air and sea transport, with ‘recreation and culture (+1.4%) and ‘alcoholic beverages and tobacco’ (+1.0%) also increasing, reflecting increased spend on entertainment for EOFY celebrations.

Spending on goods and services increased by 1.0% and 0.6%, respectively, in June. Spending on goods was marginally higher than spending on services in the twelve months to June 2026, rising 6.1% compared with 4.6% for services spending over the same period. The overall 0.8% increase in the ABS HSI in June 2026 reflected a 1.2% increase in discretionary spending and a 0.1% increase in non-discretionary spending.