Inflation and interest rates worry consumers

Interest rates remain top of mind in Australia with a combination of the May rate rise, petrol price increases and world inflation fears being reflected in falling consumer confidence. The Westpac-Melbourne Institute consumer sentiment index was released this week showing consumers are growing more pessimistic and are particularly concerned about sharp falls in share prices on world financial markets.

The Westpac-Melbourne Institute consumer sentiment index edged down by 0.5 points this month. This follows a 6-point fall in May after the Reserve Bank of Australia lifted official interest rates by a quarter of a per cent.

The consumer sentiment index’s measure of future expectations was down 4.2 points to a level that shows pessimistic responses to the survey outnumbered optimistic responses.

Treasurer Peter Costello acknowledged that the RBA’s rate rise and higher petrol prices had dented the latest monthly reading on consumer sentiment but said overall sentiment remains strong.

Sentiment about world share markets may continue to be affected, following the release this week of the US consumer price index figures. Core consumer prices rose 0.3 per cent in May; analysts had predicted 0.2 per cent. This places US inflation above the Federal Reserve’s 2 per cent upper limit at an annual rate of 3.01 per cent for 2006.

The higher than expected inflation figures raised the prospect of the Federal Reserve again lifting interest rates and this will be decided at its next Fed meeting on interest rates on June 28.

Overall, the Australian economy continues to perform strongly – as evidenced by the economic indicators released last week. It is likely the RBA will continue to maintain its anti-inflationary stance and an interest rate increase is still on the cards for later this year. But the fall in consumer sentiment reflects the need for the RBA to ensure its policies are communicated to the market carefully.