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.

Australian retail sales rose 4.8% in June 2026, compared with the same month last year. While a slight slowdown in growth, the weakness was very specific to department stores and discount department stores. Elsewhere, household goods sales strengthened and café & restaurant sales remain above trend. Retail demand remains strong and makes higher interest rates a risk. We expect the RBA will need to see retail sales growth of less than 4% in order to take a neutral stance. The drivers of a slowdown in spending will take a few more months to work through, particularly in the household goods categories.