Australia's Westpac-Melbourne Institute index of consumer sentiment published today rose sharply, up 6.2 percent to 89.9 from its previous level of 84.6 published last month. Rate cuts abroad and more promising signs of an easing in domestic inflationary pressures were factors cited for this increase. Nevertheless, the index remains close to historic lows, reflecting ongoing concerns about cost of living pressures.

Respondents to the survey reported stronger confidence in the outlook for the domestic economy over the next twelve months and five years. Reduced expectations of further policy rate increases by the Reserve Bank of Australia were cited as a factor contributing to this improvement. This was also accompanied by improved sentiment about the outlook for family finances over the next twelve months and five years, with fewer respondents expecting mortgage rates to rise over the next twelve months.

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.