Australian inflation was 3.9% for the September 2026 quarter year-on-year. The elevated inflation includes higher petrol prices and housing costs, such as rates and utilities. In retail, inflation has picked up a little to 2.2% but still remains below broader inflation. Inflation in supermarket categories receded while in non-food the dampening effect of a higher Australian dollar is keeping a lid on inflation. There are two issues to flow from the inflation result. Firstly, the prospects of another rate hike by the RBA are high and therefore will dent income and retail sales. Secondly, inflation in retail is more likely to rise in 2027 given the lagged effect from higher input costs, which is more of a risk in food categories than non-food categories.

The upcoming FY26e reporting season is likely to show better sales trends than some anticipate and active margin management that means results should meet consensus expectations. Even trading updates may be “better than feared”. Don’t misinterpret the good news. Retail sales are highly likely to slow by the December 2026 quarter. Those hoping rate cuts will be enough are overly optimistic.

Australian inflation lifted to 4.6% year-on-year as at March 2026. Across the quarter, inflation was 4.1%, up 50bp from the December 2025 quarter. In retail, price inflation ticked up by 30bp in the March 2026 quarter, driven by higher prices in clothing, footwear and furniture. We could see another 50-80bp of inflation in retail over the next year, skewed towards food categories as higher oil prices and oil-derived inputs flow through. Non-food inflation, excluding electronics, is likely to sustain very low inflation. The divergence in food inflation and non-food inflation will influence the retail sales growth path of both sub-sectors.