Australian inflation accelerated for the December 2025 quarter. Even the trimmed mean popped to 3.4%, above the RBA’s target of 3.2%. Financial markets are pricing in a strong chance of a rate hike in February 2026. We are less convinced. While broader inflation has increased, retail price inflation is largely steady at 2.1%. Liquor inflation stepped down. Electronics, hardware, furniture and sporting goods prices were in decline. The outlook for retail inflation is lower over the next 12 months given a higher Australian dollar and lower input costs.

Australian retail inflation is proving volatile overall, but it is subsiding in retail, which does present downside risk to retail sales growth.  In the September 2025 quarter overall CPI was 3.2% while retail inflation was 2.4%.  Non-food retail inflation has dropped to 0.3% on our calculations, with further downside likely over the next year. The combination of higher inflation across the economy and weaker inflation in retail products is not helpful for retailers. Lower retail inflation constrains sales growth, while the RBA is likely to delay any rate cuts given higher living costs.

While retail sales have started 2023 at a healthy run-rate, a downturn is looming. In this report, we detail our forecast for retail sales and emphasise that the June 2023 quarter is likely to be much weaker in non-food with food retailing propped up by inflation. The downturn is just commencing and likely to last until the end of 2024. We forecast retail sales growth of 2% in 2023, compared with 11% achieved in 2022 and long-term trends of 5%.

We have upgraded our retail sales outlook for FY23e given such a strong start to the fiscal year and the benefit that wages growth and inflation will have on sales over the next six months. We forecast retail sales growth of 6.0% (prev 3.4%) for FY23e and 0.8% for FY24e (prev 2.4%). The weakest period of sales growth is likely to be the December 2023 half in our view, making the downturn still some time away. We are watching retail inflation closely.