Inflation steady while retail spend remains muted

The annual rate of inflation tracked down steadily over 2023, and it now just seems a matter of time until it will move back into the Reserve Bank’s 2-3% target zone. The January monthly CPI data released this week showed that consumer prices had risen 3.4% in the 12 months to January 2024, which slightly undershot market expectations, and was consistent with the ongoing inflation moderation trend.

Note that there are differences between the monthly CPI data and the quarterly CPI data. The latest quarterly data (December quarter 2023) showed that consumer prices had increased 4.1% over the year to December quarter. The monthly indicator (which is calculated using a more limited data set) estimated price growth over the same 12 month period to be 3.4%, which means that the headline inflation figure released this week does not represent a further sharp fall in inflation, but rather a stabilisation of it. 

Chart 1: Consumer Price Index, Monthly 

Source: ABS Monthly CPI Indicator. 

The trimmed mean CPI, which is often preferred by the Reserve Bank as an indicator of price growth, did fall from annual growth of 4.0% in December 2023 to 3.8% in January 2024. This is the number that mortgage holders should be paying close attention to, as it seems unlikely that the RBA will cut rates while trimmed mean inflation remains above 3%. Indeed, the consideration in February by the RBA Board was between lifting rates and leaving them unchanged. 

The RBA will also be paying close attention to household spending in early 2024. Strong spending at Black Friday sales encouraged many shoppers to bring their Christmas spending forward, which led to underwhelming December sales numbers for retailers. As expected, we saw a healthy bounce in January with overall spending growing 1.1% in nominal seasonally adjusted terms. The strongest performers during January were Apparel (2.4%) and Household goods (2.3%).

However, overall retail activity remains weak. Retail spending has grown only 1.1% in nominal terms from January 2023, while the population of Australia is estimated to have grown 2.3% over the 2023 calendar year, and inflation was 4.1%. This highlights a significant fall in per-capita real retail spending (last year’s ‘retail recession’).

The outlook for 2024 however is stronger, against that very poor performance for retail in 2023. Deloitte Access Economics’ Retail Forecasts will be released next week, noting that for retail, 2024 may play out in two halves – a subdued first half of 2024 but then a pick up after mid-year.

Mid-year of course gets a lift because of tax cuts, but there will also be other supports for retail through 2024. Real wages are now growing, population growth is still strong and interest rates are still expected to decline in the second half of 2024 (subject to the thinking of the RBA Board!).

So while the retail environment continues to be subdued in early 2024, there should be one eye on the horizon. A business strategy focused on cutting costs to get through a subdued market could mean missing the opportunity to expand sales as broader economic conditions improve through the course of 2024.

This newsletter was distributed on 1st March 2023. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Chris Bates, Graduate at Deloitte Access Economics

Click on the links below to read our previous Weekly Economic Briefings: 

• ‘Right-sizing’ the workforce and retaining migrant talent (22 Feb).
• Taylor-made: economic trends from the Eras Tour (15 Feb)
• China’s economic prospects in the Year of the Dragon (08 Feb)
• Inflation fight ahead of schedule as Australian economy slows further (2 Feb)