Westpac's Luci Ellis notes a genuine cyclical upswing in consumer spending is underway. This follows a long period of weakness and should not be assumed to be signaling a runaway inflationary boom

A genuine cyclical upswing in consumer spending is underway. It has been building since early last year, and the final quarter of 2025 looks to have been particularly strong, if the timely indicators are a guide. The ABS Household Spending Indicator (HSI) increased by 1% in the month of November, and October had been even stronger. While the HSI only covers a subset of total consumption, the timelier Westpac–DataX Card Tracker more closely matches total nominal spending and suggests the strength continued into December. We estimate quarterly growth in consumption to have been 2% in nominal terms, and 1% in real terms, and believe that there is upside risk to these estimates. Over the past 15 years or so, rates of growth of this magnitude have been rare outside post-lockdown bounce-backs.

The question is whether this is a lasting strong trend or a blip related to holiday spending. Seasonal adjustment processes are meant to adjust for pre-Christmas shopping, allowing observers to focus on underlying trends. When those seasonal patterns change, though, as they have been with the increasing popularity of Black Friday sales, this adjustment will not be complete. As in recent years, we therefore cannot be sure that all of the recent strength is true trend rather than a ‘head fake’ from shifting seasonality.

Despite these uncertainties, something genuine does seem to be going on. Real consumption growth has picked up. Even consumption per person is rising, after several years of stagnation. The fundamentals are consistent with this. Incomes are also recovering after languishing at 2018 levels until recently. Real disposable income per person is now back close to the pre-pandemic trend. Lower inflation and the Stage 3 tax cuts reduced the squeeze on real incomes; lower interest rates also helped a little. Wealth effects from higher housing prices would also have been supporting spending over and above these income effects.

Nor is this a ‘K-shaped’ economy story where the recovery is narrowly based on spending by the already well-off. Data from our Westpac–DataX Consumer Panel to December show that the recovery in spending has been broad-based across income groups. Even consumers in the lowest tax bracket, whose spending had previously lagged, are now seeing a turnaround. Nominal spending is growing at a reasonable clip across age groups, too. The pattern seen in 2023, when spending growth lagged and even turned negative for the under-35s while older consumers’ spending remained strong, has long since passed.

We are cautious about interpreting the current upswing as a new, inflationary boom. Context is important: the gains come after several years of weakness. Interpreting that period of weakness as the new trend would be the wrong basis for comparison. The latest outcomes are not necessarily a story of rampant demand straining against stagnant supply. Leave aside our longstanding view that trend growth in supply capacity is a bit faster than the RBA and some others seem to think: the downstream effects that you would expect to see in a weaker-supply scenario are simply not in evidence.

If consumer demand really were outstripping supply, one should expect to see the effect on inflation more or less immediately; the effect of actual spending on prices is not the ‘long and variable lags’ that apply to monetary policy. While inflation did kick up in Q3 2025, the monthly data (such as they are) for Q4 so far have been less clear-cut. If this really were a demand boom, one should also expect to see the pick-up in inflation being more skewed to categories where domestic demand might play a role, like market services and some retail goods, rather than the administered prices (water, council rates) and obvious global supply shocks (meat, coffee) that dominated the list of inflation components with the highest inflation rates in recent months.

Nor do we see much of a pick-up in consumption import volumes, which would be a normal release valve in the face of a sudden upswing in domestic demand. Even overseas travel is lagging the levels it would have reached had pre-pandemic trend growth continued. One might also expect to see stronger household credit growth relative to household incomes than has been the case until recently.

This upswing in spending, though genuine, poses something of a conundrum: consumer sentiment remains pessimistic, even as people spend more. Only outright homeowners – those without mortgages – are net optimistic as a group. Renters and households with mortgages are mostly pessimistic, and increasingly so in recent months as the interest rate outlook has turned.

Is this disconnect a case of false consciousness, with people feeling worse off even though they are spending more? There is evidence to suggest that people react badly to the way past inflation lifts price levels, even after the inflation itself has passed. We also know that it is usual for most people to say that they are not better off than before, but be more optimistic about their future finances.

Or is the disconnect between spending and sentiment telling us something about the recovery, i.e. that it is more fragile than it looks? It is hard to escape the conclusion that consumption has been able to recover only because real incomes have recovered. There is a pathway where solid employment and income growth, and thus consumption, continues to recover. But that is a pathway where overall GDP growth is decent, not one where demand challenges stagnant supply.

Less benign is the scenario that sees spending growth realign with weak sentiment: the one where the recovery in spending starts to fade. For most of 2025, the labour market was easing gradually, as the economy pivoted from growth driven by the jobs-rich ‘care economy’ to the more dynamic, but less employment-intensive, market sector. The December labour data went the other way, putting into question whether that trend will continue. If it does, income growth will moderate by more than we currently expect, especially given wages growth has been relatively benign so far this cycle. And with growth in housing prices already softening in the two largest cities as the outlook for rates shifted, any positive wealth effects in play could also peter out. Suffice to say that this scenario, of a return to sluggish growth in consumer spending, is not our base case or even a major risk, but it is plausible.

Before reaching for a particular narrative to explain an outcome, be sure to guard against getting stuck in the past. It isn’t 2023 anymore. Australia is neither just emerging from a period of disrupted supply chains nor contending with a temporary surge in population growth to catch up from the effects of closed borders. It is also important to triangulate against multiple data sources, to ask, “if this were true, what else would we expect to see?”, and “what would we need to see to change our minds?”. And to be fair, it is possible that the current upswing evolves into something more exuberant over the course of this year. That is not what the latest consumption data imply, though. Consumers have been spending more because they (finally) have more income to spend. We expect this to continue – even with some moderation in income growth back towards pre-pandemic averages – and do not necessarily see it as cause for alarm.