Australian inflation for the December 2024 quarter shows an easing of inflation across retail categories as well as the underlying rate of inflation across the economy. The drop in inflation in food retail is a headwind to sales growth that is likely to persist in 2025 in our view. In non-food retail we have seen a drop in inflation in hardware, electronics and clothing. A further easing of inflation may not eventuate given the lower Australian dollar. Financial markets are increasingly pricing a 25bp rate cut for February 2025, which will be supportive of retail. The bigger issue for us is the overall rate cutting cycle may be shallow and therefore offer only mild stimulus to retail sales. We see lower interest rates boosting retail sales by 0.5% to 1.5%.

Woolworths is having a challenging time in its core supermarket business. The recent distribution centre strike will impact sales and earnings in 2Q25e, but should dissipate. More fundamentally, the company’s price investment is unlikely to deliver a decent return and online sales are margin dilutive. Across the industry, the drop in supermarket inflation gives us cause for concern about the industry’s sales and margin outlook over the next two years. While a short-term winner from the strikes, broader industry sales weakness will make it hard for Coles to deliver decent sales growth in 2025.

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.

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.