The current low consumer sentiment in Australia and the United States is at odds with relatively strong employment and consumer spending growth that both countries are currently experiencing.

This research links the decline in consumer sentiment in Australia to the cumulative, broad-based impact of high inflation on consumer purchasing power. The evidence suggests it is the persistent price pressures, rather than mortgage rates which are driving the pessimism across all household types, suggesting a return to confidence depends on inflation easing back to the target band and real incomes having time to rebuild.

Key findings

• Higher price inflation is strongly associated with weaker sentiment. 
• When inflation stays elevated, its effect accumulates, consistent with households reacting to the cost of a sustained rise in prices.
• The relationship is not country specific. In a panel of 13 OECD economies, adding inflation to a standard model explains around 30% of the common decline in sentiment since 2022.
• Mortgage rates do not provide an independent explanation.