Like most Australian retailers, JB Hi-Fi faces a weaker demand backdrop. While there are risks to sales, the difference to previous cycles is the presence of inflation in some electronics categories. Even so, investors should expect weak sales trends for up to two years for JB Hi-Fi. Near term, the phasing of the iPhone 18 launch won’t save sales in 1Q27e. Inflation in gaming consoles may boost 2Q27e and 3Q27e has some product tailwinds.

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.

The debate about the minimum wage decision for FY27e is heating up and the backdrop of rising inflation is adding risk for retailers. We expect a retail award wage increase of 3.8% to 4.3% for FY27e, with a backdrop of the trimmed mean inflation at 3.7%-3.8%. The retailers with highest sensitivity to wage cost growth are Myer, Woolworths, Bapcor and Accent Group. All retailers have adapted to higher wage rate growth over the past three years by automating elements of their business and cutting hours. Further wage savings is likely to be limited to those retailers with larger formats and flexible labour, which includes Bunnings, JB Hi-Fi and Officeworks.

Upcoming quarterly sales for Coles, Woolworths and Endeavour Group will show a continuation of recent themes. Coles Supermarkets winning, receding inflation and weak liquor volumes. We forecast 1Q26e comp sales of 4.2% for Coles and 1.6% for Woolworths. This gap is approaching a level where Coles could also win 2Q26e, an outcome that would intensify the scrutiny on Woolworths Board and management. We forecast Coles Liquor comps at -0.3% and Woolworths at -0.6%. Liquor retail is still in the doldrums, but pubs are back in growth suggesting broader liquor consumption concerns are easing.

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.

The Fair Work Commission has announced a minimum wage increase of 3.5% for FY26e. With a further 0.5% increase in superannuation payments, retail wage rate growth will be 4.0% in FY26e. This will be challenging for most retailers to offset given sales growth is likely to be 2%-3%. The retailers with the biggest challenge include Woolworths, Coles, Accent Group and Bapcor.

Australian inflation for the March 2025 quarter was 2.4% continuing a trend of decelerating inflation in the past year. Lower petrol prices and energy bill subsidies are helping. In retail, there was pick up in supermarket inflation, largely for meat and fresh produce. For non-food retail, there was deflation in a range of categories such as electronics, hardware, sporting goods and footwear, which may signal some margin pressure. With some input cost pressures and a lower Australian dollar, retail inflation is more likely to tick up from here. The trimmed mean inflation of 2.9% is instructive for the upcoming wage decision by the Fair Work Commission and may see retail wage rate growth of 3.3% to 3.7% for FY26e in our view.

The upcoming 3Q25e sales results for Coles, Woolworths and Endeavour Group are likely to show Coles in front in both supermarkets and liquor. The shift of Easter timing will distort growth rates. We forecast Coles Supermarket comparable sales at 3.0% and Woolworths at 2.6%. For Coles Liquor, we forecast 2.6% and Endeavour Retail at -0.3%. All figures are Easter-adjusted. We will be interested in any step change in inflation for produce and meat given recent weather disruptions. Overall industry sales growth rates remain lacklustre, particularly relative to cost growth

The Federal Budget for FY26e provides some added support for households given tax cuts, healthcare cost reductions and energy bill relief. The total benefit amounts to $3.6 billion for FY26e on our estimates, a 0.2% boost to incomes. This pales into insignificance compared with the FY25e tax cuts that lifted income by 1.6%. While some retailers worry about an election year, the economic setting for retail looks good and retail spending is likely to strengthen slightly over the next 12 months.

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%.