Australian economy: Outlook darkens for investors, Woolworths stuck between inflation, shoppers & shareholders

Shock inflation data sent the share market lower and Australian dollar higher on Wednesday, as investors reacted to the prospect of no further interest rate cuts until the middle of 2026.

Wednesday’s news that Australia’s headline inflation rate for the September quarter surged to 3.2 per cent year-on-year also means home loan borrowers and business owners tied to consumer confidence face a nervous period as the post-pandemic economic recovery hits turbulence with one expert predicting the unemployment rate to rise beyond its current level of 4.5 per cent.

While Treasurer Jim Chalmers dismissed the inflation rebound as related to energy price rebates rolling off and global problems, spooked investors pushed the S&P/ASX 200 Index 1 per cent lower as the gloomy cocktail of rising prices and the four-year high jobless rate spooked investors.

The Australian dollar rose to buy US66 cents to near its highest rate since in 11 months.

“The global economy is volatile and uncertain and that impacts inflation in economies around the world,” Mr Chalmers said.

Uncertain outlook

Economists say the Australia’s Reserve Bank now faces a trade-off between supporting the weak jobs market with a rate cut, or seeking to contain inflation by holding rates for a sustained period, or even lifting them higher into 2026.

“We knew there was going to be an uptick in inflation once electricity rebates were wound back, but unfortunately today’s spike is much higher than any of us anticipated and provides the justification for the RBA to sit on its hands in relation to further rate relief,” said KPMG’s chief economist Dr Brendan Rynne.

“However from KPMG’s perspective, the current cash rate remains too restrictive and when looking at the labour market it is clear that the momentum for employment growth is waning.”

Judo Bank chief economic adviser Warren Hogan has predicted unemployment rising from its current level of 4.5 per cent — a four-year high — to 5 per cent by 2027.

Inflation hits retailers

Supermarkets group Woolworths in particular has struggled to find the right strategy to navigate the pandemic-era of strong price rises without losing customers or seeing its profit margins falls.

On Wednesday morning, its chief executive Amanda Bardwell reported Australian food sales grew 2.1 per cent in the September quarter to $13.9 billion in an outcome “below aspirations” and behind market darling Coles.

Ms Bardwell told a media call that Woolworths’ supermarket prices have now fallen for seven consecutive quarters as the group sacrifices its own profits to offer shoppers cheaper prices even as Australian Bureau of Statistics data showed national food inflation rose to 3.1 per cent over the 12 months to September 30.

Over the September quarter for Woolworths shoppers items like coffee, steak, lamb, alcohol, and dairy prices have been among the big climbers, while more cyclical fruit and vegetable prices are softening as supply climbs in line with good weather. Long-life categories such as pantry, snacking, freezer and Everyday Needs were in modest deflation over the quarter.

The group’s own battles with cost inflation have pushed the share price 15.4 per cent lower over the past five years.

On Wednesday, analysts probed Ms Bardwell for guidance on how it plans to win back shoppers from Coles and German discounter Aldi.

Bank of America’s, David Errington, suggested to Ms Bardwell that Woolworths’ big problem is not attracting new shoppers to its stores who are more interested in lower shelf prices, than loyalty programs.

In other words Mr Errington suggested many shoppers see Woolworths’ Everyday Rewards loyalty program as generous versus Coles Flybuys program, but Coles is winning the supermarket wars as many shoppers will go where they think the lowest shelf prices are regardless of other incentives.

Mr Errington declared himself “confused” by Woolworths’ claim that its price promotions and advertising are starting to resonate with new customers as the supermarket group’s comparable item sales grew 0.5 per cent over the September quarter, but comparable transaction growth only climbed 0.1 per cent.

This shows the number of times Woolworths sees individual customers physically shopping is almost flat, even if they’re spending a little more when they do shop.

“You’re really putting a lot into Everyday Rewards and these offers,” Mr Errington said. “I do a lot of shopping, but I don’t take my Everyday Rewards card. I just want the lowest shelf price .I think the (survey) feedback you’re getting from existing customers might be pleasing, but new customers are not coming back into the store. Why is there a disconnect?”

The Woolworths boss responded that the company has seen a sales improvement in the current Christmas quarter as it invests in attracting new shoppers or winning back market share, rather than growing basket size.

“What we did with Everyday Loyalty Rewards is made sure we were more visible for those people it’s perhaps not front of mind for in terms of value,” Ms Bardwell said. “But we also recognise that we need to appeal more broadly in terms of value.”

Shopping around

Ms Bardwell added that the phenomenon of cross-shopping where buyers flip-flop between supermarkets in search of the best prices to offset cost of living pressures is slowing, but still a problem.

Cross-shopping rates are generally regarded as a bellwether for how keen customers are to find extra savings. For example, they’ll be prepared to travel 10 minutes further to a rival supermarket if they think they can save money when feeling that they’re under financial pressure.

However, they’ll revert to consistently going to their nearest supermarket if they feel better off and less sensitive to small extra costs.

“We were sitting at all time records (for cross shopping) this time last year,” Ms Bardwell said.

“But I’d say as cost-of-living pressure eases we’ve seen it come down and stabilise.”

Today’s inflation data has seen most economists tell Australians not to expect another interest rate cut until almost next winter in May 2026 as a chill threatens to spread across the economy.

Coles is due to reveal its quarterly sales numbers on Thursday.