Cigarettes and tobacco are the spending category most impacted by interest rate movements. The model shows that 80 per cent of changes in this spending category could be explained by changes in the Reserve Bank’s cash rate one year earlier. This result might not be clear-cut given the addictive nature of cigarettes and tobacco. However, this is probably due to the fact that people in lower socio-economic groups are more likely to smoke, and those groups are more sensitive to interest rate movements. Our model suggests this category could see one of the stronger slowdowns going forward. Consumption of cigarettes and tobacco has already fallen 8.7 per cent through the year to March. However, this would be partly driven by a general downward trend in cigarettes and tobacco consumption, reflecting significant price increases due to taxes and duties associated with health-related policies.
Expenditure related to communications, such as mobile phones, laptops, and internet bills, have also shown to be highly sensitive to cash rate movements in the past. If a recession looms, consumers may reconsider buying the latest technology and or delaying purchases. Equally, when interest rates are being cut, this is where they would adjust their spending patterns quickly. Consumption in this spending category has not yet seen a fall.
The high sensitivity of food expenditure is surprising given most consumers would consider the weekly food shop essential. However, consumers can decrease their spending in this area by substituting goods such as fresh and exclusive labels for home-brand items and frozen goods. Food consumption has fluctuated since the rate hiking cycle began but there has not been a downward trend yet.
It’s not surprising that furnishing and household goods are amongst the most sensitive goods and services to interest rate changes given a significant portion of spending on these items is from new home buyers or new renters looking to furnish their home. It’s also easier for households to spend on secondhand goods via online marketplaces or simply just choose to defer their purchases of decorative items. Consumption of furnishing and household goods has fallen 6.5 per cent in annual terms since its peak in the March quarter last year.
Transport services are the least sensitive category of spending to interest rate movements. Only 12 per cent of movements in this spending category can be explained by changes in the cash rate. When transport services are used for commuting to workplaces, it is hard to adjust spending patterns. On top of this, there might be a substitution effect with households switching from driving their cars to using public transport. For those workers who are able to work from home more frequently, particularly when the cost of travelling to work is high, this could alter the responsiveness of this consumption category. Passenger air travel for both domestic and international, as well as passenger travel by sea are included in this category. The unresponsiveness in this subcategory would be driven by the pandemic period – during lockdowns people did not travel despite lower rates and now people travel despite higher rates due to revenge spending on travel.
When excluding the pandemic period, transport services are still the least sensitive category, but 45 per cent of movements can be explained by changes in the cash rate rather than only 12 per cent.
Spending on utilities such as electricity and gas is also less sensitive to interest rate changes as they are essential goods which are difficult to reduce substantially.
Expenditures related to the operation of vehicles, such as repairs and maintenance, are also less sensitive, again because they are essential services.
Hotels, cafes and restaurants are also amongst the least sensitive spending categories. This is again driven by the pandemic period as people were not able to consume those services during lockdowns when interest rates were low and are now consuming them despite high rates. When excluding the pandemic period, hotels, cafes and restaurants become one of the most sensitive categories, suggesting this category has shown some unusual demand, particularly because of the way the pandemic impacted consumption choices.
The results line up with EY’s most recent Future Consumer Index for May, with 52 per cent of consumers surveyed strongly agreeing that high interest rates and the cost of living is impacting their ability to afford non-essential items such as entertainment, fashion and homewares. Just under 50 per cent (46 per cent) of consumers strongly agreed that these factors are impacting their ability to afford essential items such as food and healthcare. More concerning is that 34 per cent of surveyed consumers strongly agreed that they were finding it difficult to meet their mortgage repayments.
When asked about spending intent in the next four months, over 60 per cent of surveyed consumers noted that they would spend less on ‘luxury items and other indulgences.’ This was followed closely by ‘other big ticket items’ and ‘takeout/delivery meals’. Fewer consumers, 16 per cent, intended to spend less on food (canned, frozen and fresh), followed closely by household products (cleaning) and personal care items. This is likely due to their essential nature.