Australians are spending more — so why does the economy feel so bad?

Australia has entered an uncomfortable economic period in which the headline numbers do not necessarily describe how households feel.

Australians are spending more money. The economy is still growing. Employment remains relatively strong.

Yet confidence has fallen sharply.

For many households, the problem is no longer simply whether Australia is technically growing or shrinking. It is whether people feel that they are getting ahead — and increasingly, they do not.

The latest Westpac–Melbourne Institute Consumer Sentiment Index fell 5.2 per cent in September to 84.4, down from 88.9 in August.

A reading below 100 means pessimists outnumber optimists.

Westpac says sentiment has returned towards the deeply pessimistic levels seen earlier this year, with pressure coming from fuel prices, fears of further interest-rate increases, housing weakness and concern about employment. Nearly two-thirds of consumers surveyed expect mortgage rates to rise.

That is an important economic signal.

Australia may not be in recession, but a considerable number of Australians appear to be behaving — and thinking — as though economic security has become harder to achieve.

The spending paradox

There is an apparent contradiction.

The latest Australian Bureau of Statistics Household Spending Indicator shows household spending increased 1.1 per cent in July and was 7 per cent higher than a year earlier.

That does not look like a consumer economy in retreat.

But there is an important distinction between spending more money and buying more prosperity.

Prices have risen.

Housing costs have risen.

Food costs have risen.

Fuel has become expensive again.

Interest payments have absorbed a larger share of some household budgets.

A family can therefore spend considerably more than it did several years ago without feeling that its standard of living has improved.

That may be one of the defining characteristics of the present economy.

The cash register records dollars.

The household records what those dollars actually bought.

Inflation has not disappeared

Australia's inflation problem has improved from its worst levels, but it has not been solved.

The latest monthly CPI showed prices were 3.5 per cent higher in July than a year earlier.

More importantly for the Reserve Bank, trimmed mean inflation — designed to provide a better indication of underlying inflationary pressure — remained at 3.6 per cent.

Housing prices within the CPI were up 5 per cent over the year and food and non-alcoholic beverages 3.2 per cent.

Those are categories households cannot simply eliminate.

Australians can postpone buying furniture, televisions and new cars.

They cannot indefinitely stop buying food, paying rent or mortgages, using electricity or travelling to work.

That distinction matters when assessing the cost-of-living economy.

And then there is petrol

Petroleum has been a continuing focus of The Times because oil does not remain confined to the petrol station.

Expensive fuel increases household transport costs directly.

But energy costs can also move through freight, aviation, agriculture, manufacturing and eventually retail prices.

The Reserve Bank has specifically warned that higher global energy costs associated with the Middle East conflict are contributing to inflation.

It has also identified evidence that higher fuel costs are being passed through into the prices of other goods and services.

That creates an especially unpleasant problem.

Higher fuel prices weaken household purchasing power while simultaneously making the Reserve Bank's inflation task more difficult.

Interest rates are doing exactly what they were designed to do

Australia's cash rate is currently 4.35 per cent after three increases during 2026.

The Reserve Bank meets again on September 28 and 29, with its decision due on Tuesday afternoon.

A further increase is possible, but it is not inevitable.

That distinction is important.

The RBA said in August that it would consider increasing rates further if upside inflation risks materialised. Deputy Governor Andrew Hauser said this month that the question facing the Bank was whether the increases already delivered were sufficient or whether more was required.

The Reserve Bank is therefore confronting a difficult equation.

Inflation remains too high.

But the medicine being used to reduce it is itself placing households under pressure.

Higher rates suppress borrowing, construction, investment and discretionary consumption. Mortgage holders have less money available for other spending.

Eventually that weaker demand should reduce inflation.

But the adjustment can be painful.

The RBA itself expects the economy to slow and unemployment to increase gradually as higher interest rates work through the system.

Australia is growing — slowly

There is another reason the economic debate can seem confusing.

Australia is not experiencing an economic collapse.

GDP increased 0.4 per cent in the June quarter.

The economy is growing.

But the Reserve Bank expects annual GDP growth to slow to around 1.4 per cent by the end of 2026, while unemployment is forecast to edge higher.

The national economy can therefore continue expanding while individual households experience something quite different.

Population growth, government expenditure, business investment and exports can support aggregate GDP.

None necessarily guarantees that an individual Australian household feels wealthier.

That is why GDP alone cannot explain the present mood.

Confidence matters

Consumer confidence can sound like one of the softer economic indicators.

It isn't.

People who are worried about their finances behave differently.

They postpone buying cars.

They delay renovations.

They eat out less frequently.

They reconsider holidays.

They save rather than spend discretionary income.

Businesses then see weaker demand and become more cautious about investment and employment.

Economic pessimism can therefore reinforce the conditions that created it.

This does not mean Australia is inevitably heading into recession.

It means confidence deserves to be treated as an economic variable rather than simply a measure of public mood.

The political dimension

There is also an approaching political test.

The next federal election is due by 2028 under the normal constitutional timetable, not next year as a fixed requirement. Whatever the eventual election date, cost of living, housing, productivity, taxation, government spending and household financial security are likely to remain central political issues if present conditions persist.

Governments can point legitimately to employment, economic growth and measures designed to reduce household costs.

Opponents can point equally to prices, housing affordability, government finances and the pressure being experienced by households.

Neither argument completely describes the economy Australians are living in.

The more revealing question may be much simpler:

Do Australians believe their economic circumstances are improving?

At present, the confidence data suggest many do not.

The Times View

Australia's economic problem is increasingly difficult to describe with a single statistic.

The country is growing, but slowly.

Household spending is rising, but higher expenditure does not necessarily mean households are consuming substantially more.

Inflation has fallen from its peaks, but remains above the Reserve Bank's target.

Interest rates are already restrictive, yet another increase cannot be ruled out.

Employment remains relatively strong, while the Reserve Bank expects unemployment to rise gradually.

And petrol has again become both a household expense and an inflationary threat.

This combination helps explain something that conventional economic headlines sometimes miss.

Australians do not necessarily feel that the economy is collapsing.

They feel that they have less control over it.

A mortgage rate can change because of an RBA decision.

The weekly grocery bill can rise.

Petrol can jump because of events thousands of kilometres away.

Rent can increase.

Insurance can increase.

Electricity can increase.

And a household can respond by cutting discretionary spending only to discover that many of its largest expenses are the ones it cannot avoid.

That is a different kind of economic pessimism.

It is not necessarily fear of unemployment tomorrow or recession next month.

It is the gradual erosion of confidence that working, budgeting and making sensible decisions will reliably leave a household better off.

For policymakers, that may prove considerably harder to repair than a quarterly GDP number.