Australians’ willingness to spend on discretionary items, even in the face of high household debt, played a surprising role in the Reserve Bank of Australia’s (RBA) recent decision to raise interest rates. A surge in purchases of durable goods – from coffee machines and air fryers to furniture and vehicles – has contributed to broadening inflationary pressures, prompting the RBA to reassess its monetary policy.
The trend emerged last year as Australians, having endured a period of high living costs, began to spend down tax refunds and benefit from lower mortgage rates. This unexpected uptick in demand caught policymakers off guard, who hadn’t anticipated households would have the capacity for such purchases. “People seem to be withstanding higher levels of debt than previously thought,” noted Ashwin Clarke, a senior economist at the Commonwealth Bank.
The impact is visible in company earnings. Breville reported double-digit revenue growth in Australia, fueled by strong coffee machine sales, with consumers opting for models ranging from basic to high-end touchscreen devices priced around $700. Furniture retailer Nick Scali saw a 13% lift in sales revenue across its Australian and New Zealand operations, while online retailer Temple & Webster experienced a 20% revenue increase, albeit with profitability constrained by customer preference for discounts.
This spending spree isn’t necessarily indicative of a dramatic shift in financial circumstances for all Australians. Rather, it suggests a newfound confidence following a period of economic uncertainty. As Michele Bullock, the RBA’s governor, stated last week, “The things that are driving the uptick in inflation really are housing, durable goods and market services.”
The RBA’s decision to lift the cash rate earlier this month, ending its shortest rate cut cycle in 30 years, explicitly cited housing and consumer durables as key drivers of resurgent underlying inflation. The central bank also acknowledged constraints on the economy’s ability to meet demand, contributing to price increases.
While consumer durables currently represent a modest portion of the overall consumer price index, the RBA views them as a potential “canary in the coal mine.” A sustained increase in demand for these goods could signal broader, more persistent inflationary pressures that would be difficult to reverse. The RBA’s forecasts now assume the cash rate will increase by around 60 basis points by the end of the forecast period, a significant shift from the November forecasts which anticipated a 30 basis point decline.
The Commonwealth Bank’s analysis of deidentified payments data from 7 million customers reveals a continuing trend of increased spending. Household spending rose 0.5% in January, marking the 16th consecutive month of growth. Recent purchases have focused on tickets, travel, fitness, clothing, and hardware, coinciding with major events like the Australian Open and summer festivals.
Interestingly, the pattern extends to younger adults who are navigating affordability challenges. Some are turning to debt to maintain a certain lifestyle, seeking “little luxuries” even as they face financial constraints. This contrasts with a historical tendency to forgo discretionary spending during times of economic pressure.
Gary Mortimer, a retail expert at the Queensland University of Technology, points to those aged over 55 as the primary drivers of durable goods purchases, upgrading televisions, cars, and taking more travel.
However, there are signs that the initial surge in spending may be cooling. Shares in Nick Scali plunged by over 15% after the company released its earnings on Friday, reacting to weaker-than-expected January sales figures. This suggests that the buying enthusiasm seen last year may be waning as cost-of-living pressures reassert themselves.
The central bank had anticipated that demand for both housing and consumer durables would slow, thereby easing inflationary pressures. However, it cautioned that this outlook remains “highly uncertain.” The question now is whether rising inflation will dampen consumer sentiment or if Australians will continue to invest in items like couches and coffee machines. The RBA’s assessment is that the economy is further from balance than previously thought, particularly in the near term, and that a higher cash rate path is necessary to restore equilibrium between aggregate demand and potential supply.
The assumed higher cash rate path is expected to slow GDP growth to below its potential rate from late 2026 and lead to a modest rise in the unemployment rate. Aggregate demand and potential supply are not expected to return to balance until mid-2028, later than previously forecast, with inflation projected to remain slightly above the midpoint of the target range at that time.
