Consumer spending up 3.9% but another rate cut looks unlikely

Economy-wide spending rose by 3.9% in September, according to the Commonwealth Bank Business Sales Indicator, but a spike in inflation has reduced the likelihood of another rate cut.

The BSI tracks the value of credit and debit card transactions processed through CBA’s point-of-sale terminals.

Following two months of declines, the BSI rose by 3.9% in September, marking the biggest monthly gain in four-and-a-half years. Encouragingly, spending is also up 6.9% on a year ago.

The strongest monthly trend increase in sales occurred in hotels and motels, and miscellaneous stores (both up 1%), followed by clothing stores (up 0.8%), and professional services and membership organisations (also up 0.8%).

Among the weakest sectors in September were service providers (down 3.2%), mail order and telephone order providers (down 2.7%) and airlines.

However, only one of the states and territories recorded weaker sales in trend terms in September – sales in NSW fell by 0.3%.

The strongest results were in South Australia and Tasmania (both up 0.8%) followed by the Northern Territory (up 0.6%), Queensland and the ACT (both up 0.2%) and Victoria (up 0.1%).

In WA, sales were flat.

It’s worth noting the trend BSI has now risen for 16 consecutive months in the Northern Territory, for 15 straight months in Queensland, 14 in South Australia and 12 in the ACT.

In annual terms, no state or territory had sales below a year ago. The strongest growth was posted in South Australia (up 16.9%) followed by the ACT (up 12.4%), Queensland (up 9.9%), the Northern Territory and WA.

According to Adam Bennett, CBA executive general manager of local business banking, the rebound is positive for businesses, but they’re not out of the woods just yet.

“Businesses should be mindful that the data is volatile and presently consumers are not displaying any meaningful or consistent spending trends,” he said in a statement.

“It is as important as ever for businesses to have solid plans in place, and remain prudent as consumers continue to show signs of caution.”

Craig James, CommSec chief economist and author of the BSI, said the good news is that interest rate cuts are having “tangible flow-on effects” for businesses.

“We’ve seen [this] through several increases in spending this year,” James said in a statement.

“Hopefully, the recent interest rate cut in October will spur consumer confidence, and continue spending momentum in the lead-up to Christmas.”

While the October rate cut may indeed entice consumers to spend, the latest inflation data suggests a second rate cut before Christmas is no longer on the cards.

The consumer price index rose 1.4% between June and last month – the equal largest quarterly increase in more than six years – and well above market expectations.

According to Westpac, the biggest surprises were the stronger rise in food and the 4.5% rise in medical services due to the means testing of the health insurance rebate.

“We estimate that these two surprises added 0.2% to the CPI. Our forecast was for a 1.2% quarter rise,” it said.

The inflation spike has dampened expectations of a rate cut in November, although the Australian Chamber of Commerce and Industry insists the Reserve Bank still has room to move.

“The inflation figures out today came in slightly higher than expected,” ACCI’s Greg Evans said in a statement.

“But the broad economic climate, and the conditions on the ground for small and medium enterprises, in particular, demand further consideration be given to a rates reduction.”