Consumer inflation expectations hit 26-month high

Consumer confidence; CBA card spending data; CBA Household spending intentions

What happened? The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.5 per cent – the most in 18 weeks – to 101.1 (long-run average since 1990 is 112.5). Sentiment is now back above the neutral level of 100. But consumer inflation expectations over the next two years hit a 26-month high of 4.5 per cent last week.

Other data: Commonwealth Bank (CBA) Group economists reported that national household credit and debit card spending for the week ended August 13, 2021 “showed a 5 percentage point drop in spending growth from the previous week.” The CBA Household Spending Intentions (HSI) showed declines for home buying, retail, travel, entertainment, education and motor vehicle spending intentions in July.

Implications: Yesterday JB Hi-Fi delivered its eighth consecutive year of record profit growth in financial year 2021. However, the electronics retailer warned that same-store sales are down 15 per cent so far in July and August due to the closure of 55 stores because of lockdowns. And leading appliance manufacturer Breville Group today reported record sales for financial year 2021.

The consumer confidence and CBA household spending and credit card data have implications for retailers, and other consumer-focussed businesses.

What does it mean?

• Consumer confidence, as measured by ANZ and Roy Morgan, remains volatile as Australia continues its ongoing battle to contain the fast-spreading Covid-19 delta variant. Last week sentiment rose by 2.5 per cent – the most in 18 weeks – as restrictions were eased in South-East Queensland and regional Victoria. But the result should be interpreted with some caution as the survey was undertaken by Roy Morgan before regional NSW and the Northern Territory went into lockdowns, restrictions were tightened in Victoria and the ACT lockdown was extended.

• Encouragingly, the ANZ and Roy Morgan sentiment index is back above the neutral level of 100 separating the optimists from the pessimists. According to ANZ economists, sentiment in Queensland rebounded 7.5 per cent last week as restrictions were wound back. And Sydneysiders continue to display extraordinary resilience in the face of adversity with confidence up 7.1 per cent last week, despite record new Covid-19 case numbers, perhaps reflecting some optimism about accelerating vaccination rates.

• Despite increased optimism about financial conditions, consumer concerns about the rising cost of living have resurfaced, with the ANZ/Roy Morgan measure of consumer inflation expectations over the next two years hitting a two-year high of 4.5 per cent last week. Elevated petrol and food prices, along with the receipt of quarterly utilities bills and annual insurance price hikes are worrying households at a time when hours worked are being lost due to lockdowns.

• CBA Group economists reported that customer card-spending fell by 5 percentage points over the week to August 13, when compared to the previous week. The ‘open-shut’ nature of current lockdowns is weighing on spending with store closures contributing to a 20 percentage point decline in sales in Melbourne last week as the city re-entered lockdown. Spending in NSW was down just 3 percentage points and in Queensland sales lifted 8 percentage points last week.

• By category, card spending on essential items such as food remains strong, but spending on services continue to be adversely impacted by social distancing measures. In fact, the CBA Household Spending Intentions (HIS) survey for July showed declines for retail, home buying, travel, entertainment, education and motor vehicle spending intentions.

• Retailers have mostly released strong earnings results for financial year 2021 during the reporting season so far. Last week, Australia’s biggest department store, Myer, issued a surprise trading update, saying it would return to profit in the second half of the financial year for the first time since 2017. Yesterday electronics retailer JB Hi-Fi delivered its eighth consecutive year of record profit growth. And leading appliance manufacturer Breville Group today reported record sales for financial year 2021.

• But retailers, such as JB Hi-Fi, have also warned that, due to lockdowns, they cannot provide sales or earnings guidance for financial year 2022. Also, store closures have resulted in same-store sales at JB Hi-Fi falling by at least 15 per cent in July and August so far compared with a year ago, despite consumers switching to online purchases.

• That said, grocery spending is expected to hold up due to extended lockdowns. And continued momentum in electronics, furniture and hardware categories is likely, driven by strong home office, entertainment and housing market driven demand. Additional government support payments are also supportive of household spending until restrictions ease and until vaccination rates are deemed sufficiently high enough for some government restrictions to be eased.

What do you need to know?

Consumer sentiment – Week ended August 15

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.5 per cent to 101.1 (long-run average since 1990 is 112.5). Three out of five major sub-components rose last week:

CBA weekly household card spending – Week ended August 13

• CBA Group economists reported: “CBA household card spending data for the week ending 13 August 2021 showed a 5 percentage point drop in spending growth from the previous week. National spending is tracking 4 per cent higher than the corresponding week in 2019, but is significantly down from the 20 per cent pace in May prior to the Vic lockdown.”

• And, “Changes in spending patterns largely reflected these varying activity restrictions across states and territories. Spending in NSW fell (down ‑3 percentage points from the previous week), driven by a decline in regional NSW. Spending in Melbourne fell sharply again after rebounding the previous week as it re‑entered lockdown (‑20 percentage points). The shorter lockdown in regional Vic that has now lifted has meant a smaller decline in spending there (‑13 percentage points). There was a rebound in spending in Qld as restrictions were eased (+8 percentage point). Spending has remained buoyant in WA and NT, but there are some signs of a slowdown in SA and Tas.”

The Commonwealth Bank (CBA) Household Spending Intentions Series (HSI) – July

• According to CBA economists, “The Commonwealth Bank Household Spending Intentions series for July 2021 clearly shows the impact of the extensive lockdowns in place across Australia, with declines for Home buying, Retail, Travel, Entertainment, Education and Motor vehicle spending intentions. Health & fitness spending intentions continued to improve.”

Published by Ryan Felsman, Senior Economist, CommSec