Fuel relief returns, yet confidence still runs on empty

According to the Westpac‑Melbourne Institute survey, consumer sentiment increased 3.5% to 83.0 in May 2026, following April’s sharp decline. The lift reflects some easing in fuel price pressures following the temporary halving of fuel excise and slight improvement in sentiment following the Federal Budget. However, sentiment remains deeply pessimistic, underscoring a highly cautious consumer environment.

While pressure on household finances has marginally eased, forward‑looking expectations continue to deteriorate. Consumers remain increasingly concerned about inflation, rising interest rates and the broader economic outlook, particularly as inflationary pressures re‑accelerate due to the conflict in the Middle East. Surging fuel and freight costs are again pushing up CPI and squeezing household budgets. For retailers, conditions remain extremely challenging. Rising fuel, freight, and energy costs are compressing margins. Business optimism has deteriorated further, and many businesses are nearing the point of needing to pass through price increases after prolonged cost absorption has become unsustainable. However, with consumers increasingly unable to absorb further price rises, retailers will face some tough decisions over coming months.

The most recent ABS Household Spending Indicator (ABS HSI) recorded a 1.6% increase (seasonally adjusted) in March 2026, following modest growth in February. Growth in March was driven by non‑discretionary categories, particularly transport (+5.1%), reflecting soaring fuel prices, and food (+1.7%), supported by earlier Easter timing.

Overall, the March results show that while headline spending remains elevated, this resilience is increasingly non-discretionary and price‑driven. Elevated inflation, higher borrowing costs, and renewed fuel price shocks point to a more constrained outlook for households and retailers in the months ahead.

Source: Westpac – Melbourne Institute Consumer Sentiment Index

According to the Westpac‑Melbourne Institute survey, consumer sentiment increased by 3.5% from a two and a half year low of 80.1 in April 2026 to 83.0 in May 2026, recovering modestly as fuel price pressures temporarily eased following the halving of fuel excise.

The May result also came after the Federal Budget, with survey responses showing a slight improvement in sentiment despite only 15% of consumers expecting to be better off and 34% expecting to be worse off over the year ahead. The Budget response also highlighted a widening generational divide, with sentiment and expectations markedly weaker among Baby Boomers and Generation X, while Millennials remained only modestly pessimistic and Generation Z recorded outright positive sentiment.

The sub‑indexes were mixed in May, reflecting this tension:

• ‘family finances vs a year ago’ up 9.0% to 72.8;

• ‘family finances next 12 months’ up 10.7% to 93.0;

• ‘economic conditions next 12 months’ down 1.5% to 74.2;

• ‘economic conditions next 5 years’ down 2.2% to 89.3; and

• ‘time to buy a major household item’ up 2.8% to 85.6.

While household‑level measures improved, broader economic expectations deteriorated further. The Unemployment Expectations Index declined 5.2% to 140.0, partially reversing April’s spike, though concerns around labour market conditions remain elevated relative to long‑run averages. The House Price Expectations Index fell 1.8% to 150.6, indicating softer housing sentiment, while the Interest Rate Expectations Index rose 2.3% to 181.2, a fresh three‑year high, with 85% of consumers expecting mortgage rates to rise further over the next 12 months. Overall, easing fuel pressures have provided some near‑term relief, but heightened inflation risks, higher borrowing costs and a weakening economic outlook continue to weigh on consumer confidence.

Source: Australian Bureau of Statistics

The most recent ABS Household Spending Indicator (ABS HSI) recorded a 1.6% increase (seasonally adjusted) in March 2026, following modest growth in February (+0.2%). The read was 6.3% higher than March 2025. Growth in March was largely driven by transport spending, as fuel prices surged amid the conflict in the Middle East, with food also contributing as Easter festivities fell in late March. The overall 1.6% increase in the ABS HSI reflected a 0.6% lift in discretionary spending and a 3.4% increase in non‑discretionary spending, highlighting a continuation of cost-of-living pressures. This trajectory is consistent with continued upward pressure on headline CPI, with March inflation rising to 4.6%, up from 3.7% in February.

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

• ‘Transport’ up 5.1%

• ‘Food’ up 1.7%

• ‘Miscellaneous goods and services’ up 1.7%

• ‘Furnishings and household equipment’ up 1.6%

• ‘Clothing and footwear’ up 1.3%

• ‘Recreation and culture’ up 1.3%

• ‘Health’ up 0.3%

• ‘Alcoholic beverages and tobacco’ down 0.1%

• ‘Hotels, cafés and restaurants’ down 0.9%

The increase in March was driven primarily by transport (+5.1%), reflecting the impact of soaring fuel prices as shortages and war‑related disruptions flowed through. Growth was also supported by food spending (+1.7%), with earlier Easter timing highlighting that while consumers remain increasingly value‑conscious, they continue to spend selectively during festive periods.

Spending on goods and services increased by 2.9% and 0.1%, respectively, in March. While goods spending rebounded strongly in the month, services spending continues to outpace goods on an annual basis, rising 6.9% between March 2025 and March 2026 compared with 5.8% for goods. Overall, the March results suggest that higher prices continue to inflate headline spending, rather than signalling a strengthening in underlying demand.