Newly released data shows living costs are at a record high, consumers are spending less, and businesses have been shrinking for a year — a day after the Reserve Bank of Australia controversially raised interest rates to 3.85 per cent.
Figures released by the Australian Bureau of Statistics show the living costs are the highest they have been on record, and are higher than the current rate of inflation.
Over the past 12 months, all living cost indices have risen between 7.1 per cent and 9.6 per cent for all households, compared to a 7 per cent annual increase in inflation.
The difference largely stems from living cost indices taking into account mortgage interest charges — something the consumer price index does not measure. Instead, the CPI measures the cost of building a new dwelling.
Food, housing and mortgage interest charges were the biggest contributors to the cost of living increases, with employee households recording a 78.9 per cent increase in mortgage interest charges in the past 12 months because of increases to home loan interest rates.
"As a result, living costs for all household types rose more than the CPI,” said Michelle Marquardt, head of price statistics at the ABS.
The living cost index takes into account how different types of households are affected by the cost of living, taking into account 11 different commodities, including food, alcohol and tobacco, health, housing and transport.
The ABS divides Australia into five different types of households: pensioners, employees, age pensioners, self-funded retirees, and other government transfer recipients.
Data from the March quarter shows living costs for all households increased in nine of the 11 categories, with living costs only declining for clothing and footwear, and furnishings, household equipment and services — likely because they are non-essential purchases and higher cost pressures elsewhere, and prices have started to ease for imported goods.
Mortgage interest charges were most acutely felt by employee households, with an annual increase of 78.9 per cent, followed by food, which increased by 7.9 per cent.
Retail trade figures for March, also released by the ABS on Wednesday, show a 0.4 per cent increase compared to February, and by 5.4 per cent compared to last year.
Over that same period, inflation was at 7 per cent, signalling that real retail spending had generally declined.
Spending at food retailers and cafes, restaurants and takeaway services increased by 1 per cent and 1.5 per cent respectively, with all other retail industries falling in March.
Head of retail statistics for the ABS, Ben Dorber, said the increase was mainly due to inflation.
"Food retailing has now recorded 13 consecutive monthly rises, largely driven by high food inflation," he said.
"Businesses in cafes, restaurants and takeaway food services are passing on their rising costs to consumers through price rises, while also benefiting from strong demand driven by the continued return of large-scale cultural and sporting events.
"Spending on non-food retailing has slowed in response to interest rate rises and increased cost of living pressures. This follows increased spending during and immediately following much of the COVID-19 pandemic period."
Businesses are also feeling the pinch
It isn't just households and retail spending that's beginning to slow, with businesses also seeing a significant drop in activity.
Data released by Ai Group, one of Australia's major industry associations, show business has contracted every month for a year — ever since the current cycle of interest rate hikes by the Reserve Bank began.
On the back of falling demand and activity, Ai Group's Australian Industry Index fell by 14 points to -20.1 points, which indicate deeply contractionary conditions.
The index shows activity and sales fell -18.9 points in March and exports shrunk to -24.1 points, indicating negative activity, while input and sales prices have both risen.
Ai Group chief executive Innes Willox said the contraction is the result of falling demand.
"Activity and sales have fallen into contraction as demand is weakening, a pattern now affecting every subsector within industry. Yet, price pressures and shortages for supply chains and labour remain acute, trapping industry between supply constraints and falling demand," he said.
"Yesterday's decision by the Reserve Bank to raise interest rates, while necessary to contain inflation, will add more pain to businesses facing a worsening economic outlook."
Is a recession on the horizon?
RBA Governor Philip Lowe was accused of playing "recession roulette" by Deloitte Access Economics after lifting interest rates by another 0.25 percentage points.
After delivering a speech at the RBA board dinner in Perth on Tuesday night, Governor Philip Lowe was asked about whether the path the RBA is navigating to tame inflation and avoid a recession was becoming increasingly narrower.
"I don't think it's getting narrower," Mr Lowe told the audience.
"Our assessment is we're still on that path, and while there's a lot of uncertainty, it's quite plausible we can stay on it.
"Inflation is coming down. It's going to take a while, but it is coming down, and the labour market is still strong."
Mr Lowe said the Reserve Bank had not increased rates as high as other central banks around the world was to preserve the gains in the labour market.
"I think we can, and we haven't had any information to suggest otherwise, but we can only do this if people believe the inflation is going to come down," he said.
"With the rate rise [on Tuesday], I hope you'll understand is because we want to bring inflation down ... we're deadly serious about it, and we will do what's necessary to bring it down.
"I think we can stay on this narrow path."
In light of Tuesday's rate hike, both NAB and AMP have increased their probabilities of Australia slipping into a recession to 45 per cent, with AMP noting a "consumer recession" is "inevitable".
Both of the bank's chief economists, Alan Oster and Shane Oliver, also believe a technical recession, where the Australian economy experiences two successive quarters of negative growth, could happen if the RBA lifted interest rates again.
