With reference to Figure 1 and Extract A, explain two likely influences on the level of Australian real household consumption.

Figure 1: Australian Real Household Consumption (2008–2024)

Draw on this

Extract A: Australian Household Expenditure and Financial Pressures

Throughout 2023 and early 2024, Australian household spending displayed remarkable tenacity despite persistent inflationary pressures. Real consumption reached historically high levels, driven initially by a backlog of household savings accumulated during lock-downs and historically low unemployment rates which bolstered nominal wage growth.

To curb inflation, the Reserve Bank of Australia (RBA) aggressively raised the cash rate target multiple times. This rapid monetary tightening has dramatically increased debt-servicing costs, particularly for households with variable-rate mortgages, which are highly prevalent in Australia. With Australian household debt-to-income ratios remaining among the highest globally, escalating interest payments have squeezed disposable income. Many families have increasingly resorted to drawing down on their offset accounts and utilizing credit cards to cover essential costs, raising concerns about the sustainability of current consumption levels as these financial buffers deplete.