Aussie consumers are feeling the pinch again, with confidence slipping back to gloomy levels last seen in April. The latest Westpac–Melbourne Institute Consumer Sentiment Index saw a 3.5 per cent drop in October to 92.1, landing firmly in pessimistic territory.

It’s the second monthly dip in a row, wiping out the cautious optimism we saw earlier this year when the Reserve Bank handed down two rate cuts.

According to Westpac’s head of Australian macro-forecasting, Matthew Hassan, “consumers appear to have been rattled by recent updates on inflation.”

Family finances take a tumble

So what’s the main drag on confidence? Family finances.

Both the “family finances compared to a year ago” and “family finances for the next 12 months” measures fell sharply in October, down 4.8 per cent and 10 per cent respectively.

Aussies are not only feeling worse off than this time last year, they’re also less optimistic about the year ahead. Westpac says it’s the weakest result for forward-looking finances in over a year and only the second time since late 2023 that the reading has dipped below 100, which is the line dividing optimism and pessimism.

Ivan Colhoun, CreditorWatch’s chief economist, says that while inflation is easing, households haven’t felt much relief yet.

“Even with inflation moderating towards 2.5 per cent, the cost of living — or doing business — hasn’t fallen,” Colhoun notes. “That’s still a major constraint on budgets.”

It seems Aussies are still paying more for groceries, energy and mortgages, and those RBA rate cuts haven’t translated into much breathing space just yet.

Shoppers are nervous ahead of Christmas

If you were hoping for a big retail boom this Christmas, don’t hold your breath.

Westpac’s “time to buy a major household item” sub-index dipped 1.1 per cent to 97.2 in October, keeping it in slightly pessimistic territory. That’s despite a decent 22 per cent rebound from the low point last year.

The message from shoppers is we’re watching our wallets.

Colhoun suggests Australians are likely to stay “value conscious” heading into the busy shopping months of November and December.

“Consumers remain cautious about whether it’s a good time to buy major household items,” he says. “They may continue to hunt for bargains as we move into the seasonal spending period.”

Housing hopes soar, but budgets are tight

In an interesting twist, house price expectations are soaring, even as wallets are tightening.

The Westpac–Melbourne Institute House Price Expectations Index jumped another 2.1 per cent to a 15-year high of 171.9, with three-quarters of Aussies expecting prices to rise over the next year.

Queenslanders are the most bullish, with an eye-watering reading of 184, while Victorians (165) and West Aussies (166) were a touch more restrained.

So, while confidence in the economy might be low, faith in the property market is anything but. It seems Aussies would rather believe in house prices than Santa Claus.

Jobs outlook holding steady

There is at least one bright spot in the gloom, the jobs market still looks solid.

The Unemployment Expectations Index improved by 2.9 per cent in October, which means fewer people expect unemployment to rise in the coming year. The index now sits broadly in line with its long-run average, signalling that most Australians think the labour market will stay stable.

Colhoun says that’s an important buffer.

“Low and stable unemployment is an important underpinning of consumer spending and households’ ability to service debt,” he explains.

While we might be tightening our belts, most of us still have jobs, and that’s what’s keeping the economy ticking along.

Inflation jitters keep rate-cut hopes in check

The report also showed that consumers are growing less certain about where interest rates are headed.

Westpac’s Mortgage Rate Expectations Index spiked 15.6 per cent to 101.7, suggesting mixed feelings about the RBA’s next move. Early survey responses leaned towards expecting more hikes, while those taken after the RBA’s September decision to hold rates steady were more relaxed.

The RBA’s August forecasts had pencilled in two more cuts to sustain growth, but the higher-than-expected August CPI result could throw a spanner in the works.

Colhoun warns that while more rate relief is needed, it may not come before Christmas.

“The net pessimism of consumers supports the RBA’s assessment that more rate cuts will be needed,” he says. “But if inflation remains sticky, it could delay the timing of that relief.”

So, while the idea of a cheaper mortgage under the Christmas tree sounds nice, Santa might not deliver that one this year.

Why a drop in confidence matters

For small business owners, this latest dip in confidence is worth paying attention.

When households feel poorer, they spend less freely, and that flows straight through to local businesses and service providers. Add in cautious Christmas shoppers and you’ve got a recipe for patchy demand heading into summer.

However, there’s still room for optimism. Stable jobs, a resilient housing market and potential rate cuts in the pipeline mean we’re not staring down the barrel of a full-blown downturn.

“Economic conditions are a little below average presently, primarily reflecting pressure on family finances,” says Calhoun, “but it’s not all doom and gloom.”

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