Australian inflation accelerated for the December 2025 quarter. Even the trimmed mean popped to 3.4%, above the RBA’s target of 3.2%. Financial markets are pricing in a strong chance of a rate hike in February 2026. We are less convinced. While broader inflation has increased, retail price inflation is largely steady at 2.1%. Liquor inflation stepped down. Electronics, hardware, furniture and sporting goods prices were in decline. The outlook for retail inflation is lower over the next 12 months given a higher Australian dollar and lower input costs.

We have reviewed the US price and volume backdrop for Breville. Price rises put through in August 2025 look like they have stuck, albeit December was very promotional. Price rises of 3% will be partly offset by lower volume growth in our view. Breville’s 1H26e EBIT could rise by 4% with the tariff impacts only affecting three months of the period. We expect flat EBIT in FY26e.

Australian retail inflation is proving volatile overall, but it is subsiding in retail, which does present downside risk to retail sales growth.  In the September 2025 quarter overall CPI was 3.2% while retail inflation was 2.4%.  Non-food retail inflation has dropped to 0.3% on our calculations, with further downside likely over the next year. The combination of higher inflation across the economy and weaker inflation in retail products is not helpful for retailers. Lower retail inflation constrains sales growth, while the RBA is likely to delay any rate cuts given higher living costs.

Breville reported 10.2% EBIT growth for FY25, with slightly weaker growth in 2H25. The key debate on this company is the magnitude and timing of the impact of US tariffs on its earnings. We expect the combination of tariffs with some offsetting cost savings to result in a slight lift in FY26e EBIT to $206 million. The tariff headwinds will continue into FY27e because of its inventory cycle and temper EBIT growth in that year as well. We forecast FY27e EBIT of $220 million. Beyond FY27e, the company should return to 7%-10% EBIT growth.

JB Hi-Fi reported FY25 EBIT of $708 million, excluding significant items. Operating profit growth of 9% was solid and largely reflected good sales trends in the year. While the housing cycle may improve, the more important driver of its sales outlook is price inflation, which is falling away. We expect sales growth of 3%-4% for JB Hi-Fi Australia and The Good Guys. The EBIT margin profile is likely steady going forward because a higher portion of sales growth will come from low margin businesses and wage and rent cost growth will remain elevated.

Australian inflation for the June 2025 quarter has dropped further to 2.1%. In retail categories, the rate of price inflation has remained largely unchanged overall. However, there are a number of sub-sector distinctions of note. Packaged grocery inflation ticked up in the June quarter and electronics deflation eased. Hardware prices are now in decline, pharmacy prices have flat-lined and sporting goods are in deflation too.  The direction of retail inflation is likely to be lower over the next 12 months, helping affordability, but hurting retail sales growth. The benefit of lower inflation on interest rates is positive for retail outlook, but we view the magnitude of the impact as over-hyped. We expect retail sales growth to improve to 3.9% for FY26e, up from 3.3% in FY25.

With 45% of sales in the US, Breville is in the cross-hairs of the disruption from US tariffs. In this report, we assess Breville’s relative competitive position in the US for imported products, estimate the impact tariffs could have on earnings and discuss alternatives the company may pursue. Breville is in a decent position given most imports in small appliances come from China (and other Asia). Breville could see an earnings impact of -19%, or -$38 million on our estimates from the tariffs, with lower volumes, some margin compression partially offset by lower cost of goods, marketing and staff incentives.

The much-anticipated announcement by the US Government of reciprocal tariffs creates an environment of uncertainty. For Australian consumer companies, there could be a silver lining through lower cost of goods on products sourced from China or other low-cost countries. Breville and Lovisa face some challenges given their US operations, but also stand to benefit from lower sourcing costs. Treasury Wines will face tariffs on a small part of its business importing wines from NZ and Australia, but its US business could benefit from higher prices on French & Italian wines competing with its domestic US premium portfolio.

JB Hi-Fi reported 1H25 sales growth of 10% and EBIT growth of 9%. Impressive top line growth was hampered by a decline in gross margins and elevated operating cost growth. While good sales trends should continue, the results provide a reminder that gross margin declines are a risk and operating leverage is low. The company’s large cash position does bode well for further special dividends. While dividends and cash flow are attractive to some investors, the valuation remains steep in our view. 

Australian inflation for the December 2024 quarter shows an easing of inflation across retail categories as well as the underlying rate of inflation across the economy. The drop in inflation in food retail is a headwind to sales growth that is likely to persist in 2025 in our view. In non-food retail we have seen a drop in inflation in hardware, electronics and clothing. A further easing of inflation may not eventuate given the lower Australian dollar. Financial markets are increasingly pricing a 25bp rate cut for February 2025, which will be supportive of retail. The bigger issue for us is the overall rate cutting cycle may be shallow and therefore offer only mild stimulus to retail sales. We see lower interest rates boosting retail sales by 0.5% to 1.5%.