The surprising truth about spending patterns

In part this reflects the fact households are facing higher prices for non-discretionary items and are looking for offsetting savings from discretionary spending.

We often hear it also reflects shifting consumption patterns, with households increasingly spending more on experiences and less on ‘stuff’. But in fact a closer examination of the data shows this shift is not what it seems. 

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In part this reflects the fact households are facing higher prices for non-discretionary items and are looking for offsetting savings from discretionary spending.

We often hear it also reflects shifting consumption patterns, with households increasingly spending more on experiences and less on ‘stuff’. But in fact a closer examination of the data shows this shift is not what it seems.

Discretionary

While growth in nominal consumption of discretionary goods has slowed faster than for discretionary services, this largely reflects weak retail price inflation. In volume terms, consumption of discretionary goods is growing faster than for discretionary services.

In fact, our analysis suggests consumers are buying more goods at a cheaper price and are buying relatively fewer services but paying more for them. 

Soft

Household final consumption data supports the soft consumption story. Nominal consumption rose by 3.5 per cent in the first quarter, the weakest rate since 2009, with sales volumes up 2.2 per cent and prices up a weak 1.3 per cent annually.

Discretionary spending growth has been particularly weak with growth decelerating sharply since 2014, supporting the view households have matched higher prices for non-discretionary items with lower discretionary spending.

Indeed, discretionary spending rose by just 1.3 per cent, compared with a 2.6 per cent rise for non-discretionary spending.

"Consumers are buying more goods at a cheaper price and are buying relatively fewer services but paying more for them." Jo Masters, Senior Economist at ANZ

Not surprisingly, nominal spending on both discretionary goods and services has slowed in recent years, although growth in goods has slowed more sharply. This supports the argument consumers are switching their spending in favour of experiences.

The weakness in the value of discretionary goods consumption reflects weak inflation in the sector more so than weak demand.

Traditional retailers’ pricing power has been heavily impacted by the emergence of both internet shopping and the entry of foreign retailers into Australia. In contrast, services are generally not tradable or exposed to the same degree of competition as goods.

Stark

Based on the HFCE data, the sharpest price increases are for non-discretionary items such as electricity, education and food but when looking at discretionary items the comparison between goods and services is stark.

Prices for discretionary services are up on an annual basis – rising 3.1 per cent for recreation and culture and 0.7 per cent for hotels, cafés and restaurants in the first quarter.

In contrast, prices for clothing and footwear have fallen by 1.1 per cent, with an even sharper 2.2 per cent fall for furnishings and household equipment. For the record, CPI data shows the same trends.

So consumers are actually buying relatively more goods but at a cheaper price and relatively fewer services - but paying more for them.

The pressure on margins and pricing power for goods retailers is unlikely to abate any time soon given the ongoing ‘Aldi-isation’ of prices (and could even intensify with the arrival of Amazon in Australia).

For the moment, it would seem service providers have retained pricing power, although increasingly this is being challenged as technology opens more services up to external competition.

Jo Masters is Senior Economist at ANZ