Australian inflation data for the September 2024 quarter shows that inflation is coming down. Living cost pressures are easing thanks to government support, lower petrol prices, as well as lower retail inflation. However, the challenge for retail is lower price inflation may result in lower revenue growth at a time when operating costs such as wages and rents remain elevated. In supermarkets, price inflation has been propped up by fruit, vegetable and tobacco prices. In non-food retail, there is deflation in electronics, furniture, sporting goods and footwear. Electronics, furniture and auto parts could see lower inflation in future if the outsized price inflation of the past five years partly unwinds. We expect lower retail price inflation to be a headwind for the retail sales recovery, even as volumes improve over the next year.

We have updated our retail sales forecasts, which are modestly higher in FY25e and slightly lower in FY26e. We forecast FY25e retail sales growth of 3.2% (prev 2.9%) and the largest driver of our revisions is stronger non-food online sales growth. A retail recovery is underway, because this year has unquestionably strong household income growth, which sets a solid base for retail spending. However, households have a low savings rate, which detracts from the upswing. We expect a more notable pick up in household goods and online with softer sales in dining out for FY25e.

Australian inflation was 3.8% for the June 2024 quarter and retail product inflation was 2.1%. The more granular data shows that a number of retail categories are in deflation such as furniture, electronics and sporting goods. In supermarkets, packaged grocery inflation dropped, while fruit & veg prices increased. The broader news on inflation has been largely in line with RBA expectations. We expect interest rates will remain on hold till next year and movements in interest rates will have limited impact on retail spending.

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.

We have updated our retail sales outlook, with modestly higher forecasts for 2024. We forecast 2.7% growth (up from 2.5% previously). We have lifted our non-food forecasts, but lowered food & liquor forecasts. The prevailing sales trends are very soft but should improve in the back-half of calendar 2024 as income tax cuts flow through. We only see a modest pick up because lower retail price inflation will constrain overall sales growth in FY25e.

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.

Australian retail sales increased 3.0% in June 2023. The notable swings for the month were a moderation in the sales decline for electronics but a sharper slowdown for fashion and department stores. The downturn is spreading to more categories and will continue through to late this calendar year. The data also reveals that retail volumes per capita declined by 3.4% in the June 2023 quarter. Elevated price inflation is propping up spending and will fade later this calendar year in non-food and by mid-2024 in food.