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Inflation for the December 2023 quarter

Mixed blessings on lower inflation

02 February 2024

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.

Price Watch Issue 7 - The price of substitutes

Assessing relative price movements

22 December 2023

Retail prices have risen substantially over the past three years in Australia, and surprisingly there has been little damage to volumes. In Issue 7 of Price Watch, we assess the relative price movements in retail. Retail price inflation has generally only tracked broader inflation and therefore its relative affordability remains good. Moreover, our analysis across many large retailers reveals they have been meticulous in ensuring price relativities between brands and private labels have been held. Even with sensible measures on price, retailers should brace for a consumer that will increasingly substitute to different pack sizes, brands or even delay their purchase. These behaviours tend to build over time in both food and non-food retail categories.

Australian retail sales for October 2023

Consumers waiting for promotions

05 December 2023

Australian retail sales for October 2023 rose 1.3%. Category variability continued with dining out resilient and weakness in furniture, electronics and recreational goods. Supermarkets slowed as fresh deflation dented sales. The expectation of Black Friday sales in November likely gave consumers a pause during October in some discretionary categories. Our feedback on November sales and Black Friday have been stronger.

Inflation for the September 2023 quarter

Retail inflation easing back

27 October 2023

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.

Price Watch Issue 6 - Retail price drivers

The lead indicators for retail prices

07 July 2023

Like most countries, Australian retail price inflation is elevated, but looks to be peaking. In Issue 6 of Price Watch, we uncover the key lead indicators of retail price inflation. We find that price changes are well correlated globally in electronics and food. Sea freight rates are a good predictor of retail prices alongside some input price indices. The spot observations on all of these indicators suggest Australian retail price inflation is likely to fall meaningfully over the next 12 months and contribute to a slowdown in retail sales growth. We may even see deflation in categories like electronics and apparel.

Wage rate risks for retailers

The implications of the minimum wage decision for FY24e

01 June 2023

On 2 June 2023, the Fair Work Commission is due to make its decision about minimum wages for fiscal 2024. April 2023 trimmed mean inflation was 6.7% and other measures of price rises are fairly similar. In past minimum wage decisions, the Fair Work panel has decided to raise wages by 0.5% to 1.0% above the prevailing trimmed mean inflation. The Fair Work Commission is likely to be “inflation-matching” in our view and therefore an outcome above 6.0% is most likely. For more on wage risks for retail, see this report What if retail wages rise 8%?

Coles (COL) 3Q23 sales result

Sales trends to moderate

29 April 2023

Coles reported 3Q23 comparable sales growth of 6.5% in Supermarkets and 1.5% in Liquor. Sales trends have slowed in Supermarkets on an underlying basis and as inflation unwinds, comparable sales are likely to slip back to 4% by 4Q23e. We expect Coles Liquor to continue growing sales slower than market growth.

Inflation for the March 2023 quarter

Past the peak in retail as well

26 April 2023

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.

Inflation for the December 2022 quarter

Have retail price rises peaked?

31 January 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.

Retail wages

Double-edged sword for the next 12 months

12 January 2023

Back in July 2022, the wage determination for the Australian General Retail Award resulted in wage increases of 4.6%-5.2% for employees, with an additional boost from higher employer superannuation contribution. What will the next wage determination bring? Historically, we have typically seen retail wages rise slightly more than inflation. If that is the case, we think retail wages growth may be around 5% again for the 12 months starting 1 July 2023. This will be good news for employees, but a challenge for retailers as sales growth starts to slow.

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