Engel’s Law in Australia: How Income Growth Changes Household Spending

Ever noticed that as your income rises, you don’t necessarily spend much more on groceries? This isn’t just a quirk of personal budgeting—it’s a well-documented economic principle called Engel’s Law. First observed by 19th-century statistician Ernst Engel, the law explains a crucial shift in household spending patterns as incomes grow. In 2025, with Australians navigating both inflation and wage growth, Engel’s Law is more relevant than ever to understanding how we budget, save, and plan for the future.

What Is Engel’s Law and Why Does It Matter?

Engel’s Law states that as a household’s income increases, the proportion of income spent on food decreases, even if actual spending on food rises in absolute terms. In other words, food takes up a smaller slice of your budget as you become wealthier, freeing up cash for other expenses or investments.

• Absolute vs. Relative Spending: You might buy more premium groceries or dine out more often as your income grows, but food becomes a less dominant expense compared to housing, transport, or leisure.

• Historical Data: ABS data shows that in 1985, food and non-alcoholic beverages made up over 20% of Australian household expenditure. By 2024, that figure had shrunk to under 15%, despite food prices rising over time.

• Global Context: Engel’s Law applies universally, but the effect is sharper in countries with rapid income growth. For lower-income Australians, food still represents a significant budget share, making cost-of-living pressures more acute for these households.

Engel’s Law in Action: The 2025 Australian Cost-of-Living Landscape

2025 has seen both wage increases and persistent inflation, especially in essentials like energy and rent. Yet, food’s share of the average household budget is expected to continue its slow decline, according to Treasury forecasts. Here’s how Engel’s Law is playing out today:

• Wage Growth vs. Food Inflation: While food inflation averaged 3.1% in 2024-25, average wage growth hit 4.2%. Households are spending more dollars at the checkout, but food isn’t crowding out other spending as incomes keep pace or outstrip price rises.

• Changing Lifestyles: Higher-income Australians are directing a greater share of their disposable income toward travel, technology, and experiences, not just fancier food. This shift is visible in the latest HILDA and ABS household expenditure surveys.

• Policy Implications: The Albanese government’s 2025 cost-of-living relief measures—like the expanded energy rebate and increases to rent assistance—target non-food essentials, recognising that food is no longer the budget category with the sharpest squeeze for most households.

What Does Engel’s Law Mean for Your Financial Planning?

Understanding Engel’s Law is more than an academic exercise—it’s a practical budgeting insight. Here’s how it can shape your money decisions in 2025 and beyond:

• Budgeting Smarter: If you’re on a rising income trajectory, expect housing, education, and lifestyle expenses to claim a bigger share of your budget than groceries over time. This can help you set realistic targets for savings and discretionary spending.

• Cost-of-Living Pressures: If you’re in a lower income bracket or on a fixed income, food inflation still matters. Tools like bulk buying, meal planning, and shopping for specials remain critical for managing household finances.

• Spending Trends: Retailers and financial service providers are increasingly tailoring products toward non-food discretionary spending—think buy-now-pay-later for travel or electronics, not just supermarket bills.

• Investing and Saving: As food becomes a smaller budget item, households often have more capacity to invest, save, or pay down debt. This creates opportunities for building wealth or weathering financial shocks.

Beyond the Grocery Basket: The Future of Australian Household Spending

Engel’s Law helps explain why rising incomes don’t always feel like a windfall—other costs, especially housing and services, tend to rise in importance. With home ownership rates slipping and housing costs now accounting for nearly 30% of average disposable income in major cities, it’s no surprise that food no longer dominates the conversation about household budgets.

Still, as climate change, global supply shocks, and supermarket competition shape food prices, it’s worth remembering that the impact of food costs isn’t felt equally. For vulnerable Australians, even a modest increase in food prices can have outsized effects, underscoring the importance of targeted policy support.