Australian inflation stepped down further to 3.6% in the March 2024 quarter year on year. Our calculation of retail price inflation is at 2.0% for the quarter, flat on the prior quarter. Lower price inflation for retailer puts added pressure on driving volumes. While broader inflation is slowing, the pace of the slowdown indicates that rate cuts are more likely a 2025 event and risk is to the upside on the upcoming wage award decision for retailer wages.

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.

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 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.

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.