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.

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.

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.

Australian inflation for the September 2022 quarter was 7.3% with retail categories making a meaningful contribution to the price growth. Packaged grocery inflation was at its highest in more than 30 years. Retail inflation is starting to move above the sweet spot in our view. The magnitude of inflation will start negatively impacting volumes. This is more likely the risk in supermarkets, furniture and auto parts. Nevertheless, overall retail sales will continue to be propped up by price inflation over the next 12 months.

Australian inflation for the June 2022 quarter was 6.1% and retail inflation was 5%. Packaged grocery inflation was at its highest in more than 30 years and electronics, a category that is typically deflationary, showed inflation of 4%. The good news for retailers is that the inflation remains within a sweet spot with nominal sales growth supported by price rises and a very limited volume response. Expect more retail price inflation over the next six months.

Woolworths 3Q22 sales results show the company is holding onto market share gains in supermarkets and managing COVID-19 costs more tightly. The pace of inflation is picking up across the board, but the drag on volume is small. We expect supermarket sales trends to be consistent in 4Q22e and Big W should return to growth as it laps an easier baseline with less COVID disruptions.

Coles had stronger 3Q22 sales growth largely driven by higher food inflation. While market views vary, it is clear that inflation is adding to revenue growth with more to come over the remainder of 2022. Even with better sales growth, Coles is losing share, driven by fewer store openings. The company may be rational in shutting stores, but the rest of the market is not following. Coles Liquor comparable sales growth was a highlight, comfortably outstripping Endeavour. However, the business has a long way to go to lift sales productivity to a level anywhere near Endeavour.

Australian inflation has accelerated significantly with retail inflation accelerating by 120bp over the past three months. The most notable step-up in prices is in supermarkets, electronics and sporting goods. The categories that are lagging are liquor, clothing and footwear. We expect inflation to rise further in calendar 2022 given the input cost pressures that are working their way through the value-chain. The question is whether inflation is within a sweet spot, providing a boost to revenue greater than the volume decline. At current levels, we think inflation is a net positive as the rate of inflation is only slightly ahead of wage growth.

Australian inflation has accelerated significantly with retail inflation accelerating by 120bp over the past three months. The most notable step-up in prices is in supermarkets, electronics and sporting goods. The categories that are lagging are liquor, clothing and footwear. We expect inflation to rise further in calendar 2022 given the input cost pressures that are working their way through the value-chain. The question is whether inflation is within a sweet spot, providing a boost to revenue greater than the volume decline. At current levels, we think inflation is a net positive as the rate of inflation is only slightly ahead of wage growth.

The prospect of higher price inflation could significantly impact a retailer’s sales, earnings and valuation over the next three years. In Issue 2 of Price Watch, we analyse the impact price inflation has on supermarkets and non-food retailers and assess the likely volume response to price rises. The good news is even in non-food retail, price inflation 2-3 percentage points higher than average will lead to better sales, earnings and a PE re-rate.