footwear and personal accessories, department stores and cafes and restaurants in July 2022, compared to the 12 months prior, and consumer sentiment was also up, by 3.9 per cent month-on-month in September, rising for the first time since November, 2021. So what explains this discrepancy, whereby retail sales have been strong and consumer confidence was up, despite rising interest rates, inflationary pressures and cost of living stressers? According to professor of marketing and consumer behaviour at Macquarie University Jana Bowden, there is a lag effect happening with spending.  She said that consumers were starting to enjoy getting back to normality, “with a bit of revenge spending,” following the pinch of Covid-19 restrictions. This led to an “explosion in spend[ing] on apparel in the previous data, as well as more spending on department stores, household goods, food and cafes in the latest data.” However, with spending on apparel starting to soften, she believes more consumers will start asking themselves “what is essential, what is postponable, what is expendable and what is a treat?” She said that consumers are already making cuts. They’re scaling back, and steadying themselves for what is to come.  “There’s a storm on the horizon –  a perfect confluence of rising rates, a cost of living crisis with inflation yet to peak, removal of the fuel excise and on top of that falling asset prices – and all of that is sending a wave of panic through the consumer mindset,” Bowden told Inside Retail. “From a psychological perspective, the inflationary conditions along with the continued rate hikes represent a clear and present danger. It’s top of mind and it injects massive fear into the consumer because it affects their daily shopping and their immediate purchase intentions.” she said. “Not only are mortgage repayments starting to bite, but because of the inflationary conditions, it also feels bad because your money is worth less.” She believes that September’s positive consumer sentiment data was a “minor blip” amid a 12-month slump.  “Sentiment remains at historic lows and it’s now at the same level as it was during the GFC,” she said. “In other words, pessimists outweigh optimists.”  Rising interest rates hits consumer and business confidence According to Morgan Poll & ABIX manager Julian McCrann, the fall in petrol prices on 18 September to the lowest average level since early January – as well as a drop in the price of supermarket items such as lettuce and other fresh goods – led to “confidence that inflation pressures were not building in the economy.”  However, he says that rising interest rates have clearly had a negative impact on consumer and business confidence.  “ANZ-Roy Morgan Consumer Confidence was at 96.5 in late April before the ABS reported a higher than expected inflation figure in late April for the March quarter 2022,” McCann said.  “The RBA began to raise interest rates in early May and has now raised interest rates for six straight months since, by a total of 2.5 per cent to 2.6 per cent. Since then, consumer confidence has dropped by 11 points for all Australians to 85.5; for mortgage holders (people paying off their home) consumer confidence has dropped by 13.5 points; consumer confidence for people who own their own home is down 13.5 points; and even for renters consumer confidence is down 2.3 points,” he said. “Looking forward, if interest rates continue to rise they will continue to exert a negative force on both consumer confidence and business confidence. This downward pressure on confidence will continue as long as interest rates keep rising – although the size of the interest rate changes is very important to the impact they will have on confidence.”  “A delayed impact in terms of consumer spending” With $35 billion spent in stores and online – and sales increasing for eight consecutive months – to August 2022, Australian Retailers Association CEO Paul Zahra said that retail sales have been remarkable considering the challenging economic environment. He believes that savings accumulated during the Covid-19 pandemic have provided a buffer which has helped to support the industry, and that it will take some time for the impact of rising interest rates and inflationary pressures to wash through the economy.  “We expect the squeeze will eventually come as we head into 2023. The concern is that when households are under increased financial stress, discretionary purchases are some of the first things consumers cut back on,” Zahra said. “While a lot is made about the rising cost of living, the rising cost of business is in many cases more severe, and it is small businesses that are most acutely impacted. Most retailers work on tight margins, and are faced with rising costs associated with fuel, energy, supply chains and rent. This is on top of labour and skill shortages that are preventing businesses from trading at their full potential,” he added. “Interest rates have gone up six months in a row, and while we appreciate the RBA is attempting to curb inflationary pressures, we can’t ignore the fact that it might tip some businesses over the edge.”  If retailers want to keep consumers spending, Professor Bowden said that they’re going to have to tailor their offerings to the changing needs of consumers. “That means aligning prices with consumers’ perceived value of their offerings and really demonstrating how they are delivering value,” Bowden said. “This is a challenge for the retail sector. Consumer spending is the lifeblood of the economy.”