Australians can expect more discounts for items such as clothing and household goods as demand slows due to higher rates, economists say.

Prices are already falling fast for a range of popular goods, as the resolution of COVID-related supply chain bottlenecks collides with a monumental belt-tightening from Australian families.

Data published by the Australian Bureau of Statistics on Tuesday demonstrated the trend, with household spending growth slowing to 1.8 per cent in June – the lowest since February 2021.

Spending on furniture, clothing and recreation was particularly weak, the figures revealed, with each category going backwards in annual terms on a current price basis.

Economist Nicki Hutley said the consumer retreat would continue to put downward pressure on prices in tandem with improving global supply chains – which is what the RBA is hoping for.

After all, central bankers have added more than $1000 to monthly mortgage repayments for millions of households in an effort to curb their capacity to spend more on goods and services.

“Other things being equal, if you lower demand at the same time that supply constraints are easing, then you know that prices are going to come down,” Ms Hutley said.

“We will certainly get lower prices.”

Weaker demand eases prices

APAC economist Callam Pickering said weaker demand will drive prices lower, though other factors are also at play with Australia importing lower prices as supply chains rebound.

He said that RBA interest rate increases curb inflation because they “effectively pull money out of the economy”, leaving less for households and businesses to spend.

“Over time that will reduce demand for goods and services,” Mr Pickering said.

That weaker demand pushes down inflation because it can lead to excess supply among firms, sparking price drops and more discount activity to clear stock.

“Businesses will respond by producing less overall as well,” Mr Pickering said.

Prices for popular goods were already falling over the June quarter, according to the latest data.

Clothing and footwear prices fell 0.9 per cent in seasonally adjusted terms over the June quarter, while telecommunication equipment was down 0.7 per cent.

‘Deep level of pessimism’

Experts are now expecting the Reserve Bank to leave interest rates on pause until next year as the economy slows, with the theory that inflation will now continue falling without further hikes.

A pause in August has done little to stir consumer confidence, with data published on Tuesday by Westpac and the Melbourne Institute finding the index fell another 0.4 per cent in August.

At 81 (where a score of 100 is neutral) the consumer confidence index remains deeply negative, with Commonwealth Bank economist Harry Ottley saying there’s a “deep level of pessimism”.

“Until expectations of rate rises are lowered and inflation moves closer to target, sentiment is unlikely to materially improve,” he said.

The good news is that inflation is now expected to ease faster than previously thought, according to Westpac, which on Tuesday published new forecasts shaving 0.4 percentage points off their end-2023 Consumer Price Index (CPI) forecast to 3.9 per cent.

“The June quarter CPI surprised to the downside, continuing the trend of that while prices are still rising, many of these increases are smaller than they have been in recent quarters,” Westpac’s Justin Smirk said.

The RBA, meanwhile, is expecting headline inflation to fall to 3.25 per cent in annual terms by the end of 2024 and from there reach its 2 to 3  per cent target band by the end of 2025.