The Westpac-Melbourne Institute consumer sentiment index rose by 2.7 per cent to 81.3 in July but remains at deeply pessimistic levels by historical standards.
In fact, it was a weaker result than I expected given that the Reserve Bank unexpectedly paused their interest rate hikes in July.
What it shows is that the very low levels of consumer sentiment that have been with us for more than a year now are being driven primarily by inflation, not interest rates.
One of the reasons for that is that while roughly a third of the population has a mortgage, everybody is affected by the surge in the cost of living.
As such, the key driver for the improvement in sentiment in July is likely to have been better numbers for inflation, with the monthly consumer price index easing to 5.6 per cent in May, from 6.8 per cent in April.
Another notable feature in the latest report was a further weakening of people’s confidence in their jobs. The unemployment expectations sub-index has now seen around a 30 per cent deterioration from the peaks we saw several months ago.
On a more positive note, people continue to grow more confident in the outlook for house prices. Optimists on the prospects for the property market now outnumber pessimists by more than five to one.
Overall, we still think the RBA will need to increase the cash rate again.
The unemployment rate is incredibly low at around 3.5 per cent, and the RBA has indicated it needs to rise to 4.5 per cent to be consistent with them meeting their inflation objective.
As we’re seeing across the rest of the world, central banks still have further to go in this tightening cycle, and we expect the RBA to increase the cash rate in August and September.
For the full report, visit WestpacIQ.