Gen Z’s growing obsession with premium treats and experiences is helping drive discretionary prices higher as the Reserve Bank of Australia tries to keep inflation in check without crushing jobs, but this tradeoff looks like it could lock the country into higher inflation for longer.
Right now, a wave of younger consumers is powering a new kind of spending culture where queues for trendy desserts and lifestyle experiences can stretch for more than an hour and this appetite for “living well now” is feeding straight into the Consumer Price Index. Many of these younger Australians sit on the fringes of the housing market, feel disconnected from the impact of rising interest rates and increasingly turn to alternative assets like crypto as their version of a wealth plan. Their behaviour shows up clearly in consumption data, which reveals that Australia’s spending machine is still running hot even as borrowing costs rise.
Despite several rounds of rate hikes, consumer demand has barely cooled, with rate cuts in recent years often treated as extra cash to spend rather than a chance to rebuild savings and youth-driven discretionary categories remaining particularly resilient. Unemployment among younger people hovers in the mid-to-high single digits yet this cohort still spends aggressively on leisure, food and digital assets, operating almost as if traditional economic constraints do not apply. Australia’s real cash rate now sits near the bottom of the developed-world pack and is on track to turn deeply negative if headline inflation keeps rising, because official inflation forecasts have repeatedly underestimated how sticky and unpredictable price pressures can be. Policymakers effectively rely on what they see in real-time data, then scramble to adjust when their forward projections miss the mark.
In the background, the central bank has deliberately kept real interest rates lower than many global peers to preserve the jobs boom that followed the pandemic and the strength of the labour market suggests that strategy worked in the short term. But this choice came with a cost, because the entire population now shoulders a higher price level so that a relatively modest number of additional jobs could be created, a tradeoff that many households may find increasingly hard to accept as everyday bills keep climbing. The bank’s mandate to deliver both full employment and roughly 2.5% inflation is proving almost impossible to satisfy at the same time and the current environment suggests the country is being pushed toward a “new normal” of structurally higher nominal interest rates, where the near-zero cash rates of the past decade become a historical anomaly.
Looking ahead, Australia seems to be entering an era where the bill for years of aggressive money printing and generous fiscal policy finally falls due and that bill is payable in the form of more persistent inflation and a higher baseline for borrowing costs. Strong demand engineered during past downturns gave households more to spend in the moment, but the hidden price is increasingly volatile prices and a central bank that may need to adopt a tougher, more prolonged tightening stance. The longstanding tension between supporting jobs and controlling inflation is now front and centre and tools such as quantitative easing and yield curve control do not cleanly separate labour market outcomes from price stability. As Gen Z continues to spend freely on lifestyle and digital aspirations and traditional levers like rate hikes struggle to rein them in, the central bank looks set to face harder choices about which side of its mandate to prioritise and how much inflation pain the public is willing to tolerate in the process.
