With reference to Figure 1 and Extract A, explain two likely influences on the level of Australian real household consumption.
| Year | Consumption (billions of AUD) |
|---|---|
| 2008 | 720 |
| 2011 | 770 |
| 2014 | 830 |
| 2017 | 910 |
| 2019 | 980 |
| 2020 | 910 |
| 2021 | 960 |
| 2022 | 1010 |
| 2023 | 1060 |
Despite rising inflation and cost-of-living pressures, real household consumption in Australia grew robustly over 2022 and 2023. Real consumption rose to 1060 billion AUD by the end of 2023. This resilient spending was initially underpinned by a tight labor market with low unemployment, alongside the gradual depletion of accumulated household savings built up during lockdown periods.
However, in response to persistent inflation, the Reserve Bank of Australia (RBA) raised its cash rate target dramatically throughout 2022 and 2023. Given that a high proportion of Australian mortgages are on variable rates or short-term fixed rates, this aggressive monetary tightening rapidly translated into higher debt-servicing costs. As households directed more of their disposable income towards mortgage interest payments, discretionary cash flow was severely compressed. Furthermore, softer housing market valuations have dampened consumer confidence, raising concerns that a negative wealth effect will further suppress future household expenditure.
