We’re supposed to be struggling, yet we’re spending more. Why?

Detailed summary

Most Australians feeling the cost-of-living crunch are continuing to spend on non-essentials. It’s not an irrational response.

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Since the beginning of the year, my mortgage repayments have ballooned by nearly $300 a month. My savings, of course, have taken a hit – but mostly from me spending more (and not necessarily on the things I strictly need to be buying).

It sounds a bit counterintuitive. The conventional wisdom is that my spending on goods and services should shrink as I find myself pouring more of my income into my mortgage, especially if I’m feeling pessimistic about the economy and want to build up a bigger safety buffer.

After all, cutting back spending is the rational thing to do when we’re faced with cost-of-living pressures and warnings of a slowing economy, right? We tighten our belts and stash away what we can.

It’s also what the Reserve Bank is relying on happening. Interest rates work in various ways. But especially in Australia, where most people’s borrowing costs move in line with the official cash rate set by the Reserve, the main way they work is by reducing the amount of money people have to spend.

That’s supposed to weaken overall demand and reduce how much businesses can raise prices.

Yet, despite five interest rate rises this year and prices continuing to grow above the Reserve Bank’s 2 to 3 per cent target, Australian consumer spending has remained relatively resilient.

Of course, some of this can be explained by the fact that some Australians – largely those who are older, have paid off their mortgage and have large savings in the bank (which grow faster as interest rates rise) – have become better off and more willing to spend and enjoy the finer things in life.

Consumer spending is also partly driven by outlays most of us don’t have a choice but to partake in.

Opening of the article, excerpted from WAtoday. To read the rest, open the article on the publisher's site.