Australian inflation data for the September 2024 quarter shows that inflation is coming down. Living cost pressures are easing thanks to government support, lower petrol prices, as well as lower retail inflation. However, the challenge for retail is lower price inflation may result in lower revenue growth at a time when operating costs such as wages and rents remain elevated. In supermarkets, price inflation has been propped up by fruit, vegetable and tobacco prices. In non-food retail, there is deflation in electronics, furniture, sporting goods and footwear. Electronics, furniture and auto parts could see lower inflation in future if the outsized price inflation of the past five years partly unwinds. We expect lower retail price inflation to be a headwind for the retail sales recovery, even as volumes improve over the next year.

Australian inflation was 3.8% for the June 2024 quarter and retail product inflation was 2.1%. The more granular data shows that a number of retail categories are in deflation such as furniture, electronics and sporting goods. In supermarkets, packaged grocery inflation dropped, while fruit & veg prices increased. The broader news on inflation has been largely in line with RBA expectations. We expect interest rates will remain on hold till next year and movements in interest rates will have limited impact on retail spending.

Australian inflation stepped down further to 3.6% in the March 2024 quarter year on year. Our calculation of retail price inflation is at 2.0% for the quarter, flat on the prior quarter. Lower price inflation for retailer puts added pressure on driving volumes. While broader inflation is slowing, the pace of the slowdown indicates that rate cuts are more likely a 2025 event and risk is to the upside on the upcoming wage award decision for retailer wages.

Australian inflation stepped down to 4.1% in the December 2023 quarter year on year. Our calculation of retail price inflation is at 1.9% for the quarter dropping back from 3.4% in the September quarter. The drop in inflation is negative for the revenue outlook in retail, particularly given retail volumes (including supermarkets) are also declining. However, the more rapid drop in broader inflation may help bring forward interest rate cuts and ease wage pressures a little in FY25e.

Australian inflation rose 5.4% in the September 2023 quarter, with our calculation for retail price inflation at 3.4%. Retail inflation has slowed significantly in some categories, particularly food, furniture, auto parts and sporting goods. The lower inflation reflects lower input costs flowing through and may be supportive of gross margins against a backdrop of rising operating costs such as wages and rent. Even so, it is likely that inflation fades further and is another headwind for nominal sales growth near-term given volumes are also sluggish.

Australian inflation rose 6.0% in the June 2023 quarter and we calculate retail price inflation was 5.2%. Retail inflation is easing off, but still well above long-term trends. Packaged grocery inflation is double digits and the only discernible drop in retail inflation is in large/small appliances and footwear. Input and freight costs are falling for a range of retail goods and retail inflation will be much lower in 2024 with lower input costs a margin cushion for many retailers to help deal with weaker demand and higher wage costs.

Australian inflation of 7.0% in March 2023 quarter suggests price rises peaked in December 2022. We think the same is true of retail prices. Inflation has dropped meaningfully in appliances and furniture prices are starting to fall.  Food inflation has also peaked albeit this is more a function of fresh categories which now have very low inflation such as vegetables and red meat. The unwind of elevated inflation will see retail sales slow. The drop is more noticeable in household goods with a more significant slowdown likely in other non-food categories later in calendar 2023.

Australian inflation for the December 2022 quarter was 7.8%. Retail categories have had similar price increases, propping up retail sales growth. Retail volumes are already flat to declining based on our analysis. Packaged grocery inflation accelerated further to 7.0%. We expect the rate of retail inflation has peaked and volumes will start to decline at a faster rate this year.  This is more likely the risk in supermarkets, furniture, appliances and auto parts. Nonetheless, overall nominal retail sales growth will continue to be underpinned by price inflation over the next six months.

Australian inflation for the September 2022 quarter was 7.3% with retail categories making a meaningful contribution to the price growth. Packaged grocery inflation was at its highest in more than 30 years. Retail inflation is starting to move above the sweet spot in our view. The magnitude of inflation will start negatively impacting volumes. This is more likely the risk in supermarkets, furniture and auto parts. Nevertheless, overall retail sales will continue to be propped up by price inflation over the next 12 months.

Australian inflation for the June 2022 quarter was 6.1% and retail inflation was 5%. Packaged grocery inflation was at its highest in more than 30 years and electronics, a category that is typically deflationary, showed inflation of 4%. The good news for retailers is that the inflation remains within a sweet spot with nominal sales growth supported by price rises and a very limited volume response. Expect more retail price inflation over the next six months.