For all Australians, it is welcome news to hear that the drivers of excessive rainfall may be easing. The Bureau of Meteorology is suggesting La Nina may be over by January or February 2023. In addition to more favourable weather, there is a silver lining for everyone because growing conditions will improve around the world. La Nina creates dry conditions for many northern hemisphere countries and tends to lift prices for soft commodities like wheat. As shown below, the wheat price tends to be higher when the Southern Oscillation Index is high (La Nina) and wheat prices tend to be lower when the Southern Oscillation Index is low (El Nino). Some of the drivers of inflation should diminish as La Nina eases.

The feedback from companies experiencing cost pressures is growing. The spike seen in both soft commodity prices and transport costs has persisted for longer and will lead to higher supermarket inflation in our view. The only remaining question is when, and by how much? We expect some evidence to show through in August-September 2021 given supplier feedback. Packaged grocery inflation is likely to be 1.5-2.0pp higher by early calendar 2022. Inflation is generally positive for supermarket retailers sales and earnings.