Consumer sentiment nears historic lows following rate hike

According to the Westpac-Melbourne Institute survey, consumer sentiment declined 4.7% to 80.4 in October 2026, returning to the extreme lows recorded earlier in the year. This is the third time sentiment has fallen to around 80 during 2026, forming part of the weakest period of recurring consumer sentiment since the 1990s recession. Higher fuel prices and interest rates continue to place significant pressure on household finances.

The latest RBA rate increase had a particularly significant impact on consumer confidence, with sentiment deteriorating sharply following the decision. Expectations for further rate rises also remain high, particularly among mortgage holders, which suggests discretionary spending is likely to remain under pressure in the near term.

For retailers, this creates a difficult backdrop heading into the major November and Christmas sales period. Consumers have increasingly concentrated discretionary purchases around promotional events, however the sustained pressure on households this year (with more to come) may mean even greater and more widespread discounting is required to stimulate demand.

The latest ABS Household Spending Indicator was unchanged in August 2026 compared to July 2026 but 6.8% higher than August 2025. The headline result was supported by higher fuel and transport spending. Total household spending excluding fuel declined by 0.3%. Together with declines across six of the nine spending categories, this points to softer underlying household demand heading into the key retail trading period.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

According to the Westpac-Melbourne Institute survey, consumer sentiment declined 4.7% from 84.4 in September 2026 to 80.4 in October 2026, leaving sentiment 12.7% below October 2025. Higher fuel prices and the latest RBA rate rise were the key drivers of the deterioration. The impact of the RBA’s decision was particularly pronounced with sentiment among consumers surveyed before the rate rise at 86.9, compared with just 67.2 among those surveyed after the announcement. The nearly 20% deterioration was the largest difference between pre- and post-RBA survey responses since Westpac began tracking daily responses in 2019.

The component indices all declined in October:

• ‘family finances vs a year ago’ down 8.0% to 66.9;

• ‘family finances next 12 months’ down 6.4% to 88.4;

• ‘economic conditions next 12 months’ down 1.6% to 78.3;

• ‘economic conditions next 5 years’ down 0.4% to 85.5; and

• ‘time to buy a major household item’ down 7.1% to 83.0.

Pressure on household finances has intensified. The ‘family finances vs a year ago’ sub-index sits at 66.9, in line with the extreme low recorded in April, while the ‘family finances next 12 months’ sub-index is now within the bottom 10% of historical readings. Of particular relevance for retailers, the ‘time to buy a major household item’ sub-index fell 7.1% to 83.0, around 40 points below its long-run average.

Interest rate expectations remain elevated, with more than 80% of consumers surveyed after the RBA decision expecting mortgage rates to rise over the next 12 months, increasing to c.90% among mortgage holders. With the prospect of further rate increases remaining, borrowing costs are likely to continue weighing on household spending decisions.

Source: Australian Bureau of Statistics

The most recent ABS Household Spending Indicator (ABS HSI) was unchanged at 0.0% (seasonally adjusted) in August 2026, following increases of 0.9% in June and 1.1% in July. Household spending was 6.8% higher than August 2025. Fuel spending and vehicle purchases were the main drivers during the month. Excluding fuel-related spending, total household spending declined by 0.3%.

Household spending fell in six of the nine sub-categories in August:

• ‘Transport’ up 2.3%

• ‘Hotels, cafes and restaurants’ up 0.8%

• ‘Miscellaneous goods and services’ up 0.3%

• ‘Food’ decreased 0.3%

• ‘Furnishings and household equipment’ decreased 0.6%

• ‘Health’ decreased 0.9%

• ‘Alcoholic beverages and tobacco’ decreased 1.0%

• ‘Clothing and footwear’ decreased 1.0%

• ‘Recreation and culture’ decreased 1.4%

The increase in transport spending (+2.3%), reflects higher fuel spending and increased spending on electric vehicles. Fuel spending increased 8.1% following the full restoration of fuel excise from 3 August. Fuel prices are now c.28% higher than the beginning of 2026. As noted above, not only does higher fuel prices negatively impact consumer sentiment and spending, they also directly impact retailer margins, alongside higher wages, utilities, and other transport costs. 

Weaker spending was seen across a number of discretionary categories, including ‘recreation and culture’ (-1.4%) and ‘clothing and footwear’ (-1.0%), following stronger spending in prior months which was associated with major sporting events and promotional activity in June/July.

Spending on goods increased 0.3% in August, driven by motoring goods and vehicle purchases, while spending on services declined 0.3%, reflecting lower spending on recreation and cultural services, health services, and personal care.  With retailers having already experienced a prolonged margin squeeze, the upcoming sales events like Black Friday will be critical for generating cash and strengthening retailers balance sheets as they approach the end of 2026 and early 2027.