THE EFFECTS OF INFLATION AND POLICY INTEREST RATES ON CONSUMER SPENDING

Abstract

This study aimed to (1) examine the relationships among inflation, interest rates, and consumer expenditure, and (2) analyze the effects of inflation and interest rates on consumer expenditure. The study employed a quantitative research approach using secondary annual time-series data covering the period from 2010 to 2026, comprising 17 observations. Multicollinearity was assessed using the Variance Inflation Factor (VIF) and Tolerance statistics, with a VIF of 1.0435 and a Tolerance value of 0.9583, indicating no evidence of multicollinearity among the independent variables. The stationarity of the time-series data was examined using the Augmented Dickey-Fuller (ADF) test, which indicated that all variables were stationary at the first-difference level. Multiple regression analysis was subsequently employed, with statistical analyses including the t-test, Pearson’s correlation coefficient (R), and the coefficient of determination (R²). The results revealed a very strong positive relationship between consumer expenditure and headline inflation. The findings also confirmed that headline inflation and the policy interest rate did not exhibit multicollinearity. Among the explanatory variables, headline inflation had the strongest effect on consumer expenditure, with a standardized regression coefficient of β = .981, which was statistically significant at the .01 level. Overall, the regression model demonstrated a very strong relationship between headline inflation and consumer expenditure and explained 96.3% of the variance in consumer expenditure. The findings suggest that inflation is a particularly important macroeconomic factor influencing consumer expenditure and should therefore be taken into consideration in the formulation of economic and monetary policies aimed at maintaining household purchasing power and economic stability.

Keywords: Inflation, Interest Rate, Consumer Spending