Why rising interest rates and petrol prices have caused the biggest drop in spending power in two decades
Rising oil prices and multiple interest rate hikes have dealt the biggest quarterly blow to household finances in more than two decades.
The spending power of families with a mortgage and two cars fell by an average of $450 per month in the March quarter of this year, while non-essential funds available to a typical renting couple fell by $180 per month. Direct homeownership households were the least affected, with a $140-per-month decrease in non-essential funds.
A report from economic consultancy Polis Partners tracking household finances shows that the first three months of 2026 will see the sharpest quarterly decline in discretionary household income since the series began in 2004.
During this period, the Central Bank increased interest rates twice, and oil prices rose above $2.50 per liter in late February following US and Israeli attacks on Iran.
This financial double whammy has wiped out almost all of the improvement the average household had made to its budgets in 2024 and 2025, leaving them “where they were 15 years ago in real terms,” the study said.
The Central Bank also lifted the interest rate in May, but the effects of this decision were not included in the study.
Polis Partners director Rob Tyson said this year had shown how quickly household budgets can deteriorate when multiple cost pressures arise simultaneously.
“There’s been a huge jump in the amount households need to spend on basic needs, which leaves a lot less money to spend on other things,” he said.
But the impact has been uneven.
“Housing conditions, household composition and income shape how much risk a family is exposed to,” Tyson said.
“A couple with a mortgage and two gas cars that they use to drive their kids around and commute to work has been really hit hard, whereas a self-funded retired couple who are paying off the house and driving an electric vehicle are largely insulated from the shock.”
The bottom 20 percent of earners were disproportionately affected; These households’ basic expenses exceed their income by approximately $81 per week, on average; This means they need to save or take out loans to make ends meet.
Middle- and lower-middle-income households have seen a significant decline in the amount of discretionary funds they can spend.
But higher-income households, especially those who own their homes outright, are relatively insulated from the cost-of-living squeeze.
For the full year through March 2026, the amount the average household had to spend on non-essential needs fell by $782.
Tyson warns Australian households could suffer further.
“Unfortunately, the tension is not over,” he said.
“The pressure will continue into the June quarter as another interest rate rise reduces any relief from fuel excise duty halving. Continued uncertainty around fuel prices and future RBA decisions could cause Australian household budgets to deteriorate further throughout the year.”
Bowser prices peaked in early April before returning to more normal levels in May and June. However, after the renewed conflicts in the Middle East, fuel prices are increasing again.
quarterly Household Report by Police Partners It uses national income, expenditure and price data to track how much Australian households have left over for non-essential spending after basic living costs.
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Matt Wade is senior economics writer at The Sydney Morning Herald.Connect with: X or email.
