Interest rate cut growing more unlikely as soaring consumer spending recorded for October

Soaring consumer spending ahead of the busy Christmas season has destroyed any prospect of an interest rate cut next year.

Household spending increased by 1.3 per cent in October, which was the biggest monthly increase since January 2024 and more than double the 0.6 per cent rise economists had expected.

The annual increase of 5.6 per cent was the highest in two years and well above the 3.8 per cent inflation rate.

With inflation already well above the Reserve Bank of Australia’s 2-3 per cent target, AMP economist My Bui said rate cuts were now off the table in 2026.

“Today’s data underscores the RBA’s view that household spending is recovering and there is some ‘tightness’ in the supply capacity of the economy,” she said.

“We think that there is still some fragility given the noisy nature of the data but acknowledge that the Reserve Bank will likely remain on hold for the foreseeable future, given robust spending data, higher than expected inflation, and an unemployment rate of 4.3 per cent.”

EY chief economist Cherelle Murphy said the RBA’s three rate cuts in February, May and August had encouraged Australians to buy more non-essential discretionary goods.

“This enticed consumers to spend more on clothing, footwear, furnishings and electronics, while major concerts and cultural festivals held during the month also led to a strong lift in accommodation services,” she said.

Goods inflation is now becoming a problem with the latest Australian Bureau of Statistics data on household spending showing the amount spent on clothing and footwear had surged by 3.5 per cent in October alone, followed by a 3 per cent monthly increase on furnishings and household equipment.

Over the year, the broad miscellaneous goods and services category soared by 9.4 per cent, covering everything from haircuts to childcare, jewellery and financial services.

Health costs soared by an annual pace of 7.5 per cent, ahead of recreation and culture on 7.3 per cent, food on 7 per cent and hotels, cafes and restaurants on 6.4 per cent.

Ms Murphy said a low jobless rate could also give sellers of goods and services an excuse to put up their prices, which potentially adds to inflationary pressures in the economy.

“The Reserve Bank will be concerned that businesses will continue to increase prices at a rate higher than it can tolerate,” she said.

But ANZ economists Aaron Luk, Sophia Angala and head of Australian economics Adam Boyton said strong activity during October and last month’s Black Friday sales could mean a more subdued December in the lead-up to Christmas.

“There is some risk that the earlier start to promotions pulled some spending into October from November, which suggests this result is unlikely to be repeated next month,” they said.