Australia's Westpac-Melbourne Institute index of consumer sentiment fell 6.9 percent on the month from 84.3 in January to 78.5 in February, largely reflecting concerns about higher inflation and higher interest rates. This sharp drop in the index takes it to its lowest level since April 2020 during the initial stages of the Covid-19 pandemic. Respondents reported weaker sentiment about the outlook for the economy over the next 12 months and 5 years and their finances over the next 12 months and are also more optimistic about purchasing a major household item or a house.

Weakness in confidence reflects increasing concern among consumers about the impact of policy tightening that has already been delivered by the Reserve Bank of Australia and expectations of additional tightening. This month's survey was conducted over four days last week, just before and just after the RBA increased policy rates for the ninth consecutive time and signalled that more rate hikes will be required to curb inflation. The proportion of respondents expecting mortgage rates to increase by at least 100 basis points from current levels over the next 12 months rose from 48 percent in January to 53 percent in February. Respondents, however, remain relatively confident about the outlook for the labour market.

The Westpac-Melbourne Institute Index of Consumer Sentiment is based on a survey of 1,200 consumers on their assessment of short-term and long-term prospective economic conditions and their own financial circumstances. The survey is conducted early each month, usually just before and just after the Reserve Bank of Australia's monthly policy meeting.

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is on whether economic growth is too strong and leads to inflation.

Consumer spending is the largest part of economic activity, so markets always closely follow consumer behaviour and sentiment. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.