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.

Retail prices may be the first to contribute to lower inflation. Recent data from the ABS shows the impact that sea freight costs had on certain retail categories through COVID-19. The chart below shows freight costs as a share of the total product cost for imported product categories. Furniture freight went from 6% of the total cost in 2019 to 19% in February 2022.  It was a similar story for appliances.  The unwind of retail inflation is likely to vary greatly by category and is happening already in highly imported categories. In our view, these retail segments are likely to report the weakest sales trends as inflation unwinds quickly. For more click here Report on retail outlook