Australian retailers’ second-half earnings at risk as higher fuel prices, interest rates hit consumers

Australian retailers are facing a hit to second-half earnings as rising fuel prices crunch household budgets, expectations of interest rates rises and consumer confidence starts to deteriorate.

Citi analyst Adrian Lemme said every 10¢ per litre increase in petrol prices would add about $1.6 billion in annual costs for consumers.

“There are early signs that the rapid fuel increase is beginning to dampen consumer confidence,” Mr Lemme told clients in a note, with average unleaded prices now above $2.40.

It came the same day the Reserve Bank of Australia lifted the cash rate from 3.85 per cent to 4.1 per cent, reversing two of the three cuts in 2025, amid fears surging petrol prices would push inflation — now at 3.8 per cent — even further above the 2 to 3 per cent target band.

But while Citi expects another rate hike in May, it reckons the direct impact on household budgets is relatively small compared with higher fuel prices.

Australian Retail Council chief executive Chris Rodwell said the sector was again facing a double hit, this time from rising supply chain costs from the global oil shock and a rate rise likely to further squeeze household spending.

“Through the second half of last year and into January this year, we began to see stable conditions return,” he said, adding that while growth was not extraordinary, “it was solid and steady”.

“Consumers remained highly value-conscious, with spending concentrated around promotions and discounting as households looked to stretch their budgets.

“That meant retailers were working harder to maintain margins, even as trading conditions began to stabilise.”

Consumer discretionary stocks have fallen nearly 13 per cent over the past month, with Domino’s Pizza, Nick Scali, Premier Investments and Lovisa among the laggards.

But Mr Lemme has left his forecasts and recommendations unchanged as the recent sell-off in retail stocks could reverse if tensions in Iran ease or the Government reduce the fuel excise.

ANZ and Roy Morgan on Tuesday revealed consumer confidence had hit its lowest since March 2020, when the first COVID-19 pandemic lockdowns were announced.

“Households are increasingly pessimistic about the one-year and five-year outlooks for the economy, likely driven by geopolitical uncertainty and the shifting outlook for inflation and rates,” ANZ economist Sophia Angala said.

“Inflation expectations are still at their highest since November 2022, supported by the recent sharp rise in petrol prices.”

Separate National Australia Bank data out the same day showed consumer spending rose 0.4 per cent in February, with gains across most categories offsetting a 3 per cent fall in fuel spending.

Travel spending declined for a third consecutive month, suggesting households remain cautious on discretionary trips.

But NAB said the data likely does not yet fully reflect recent challenges posed by the February rate hike and the conflict in Iran.

Consumer spending grew across all States and Territories in February, led by the ACT (up 1.6 per cent), Northern Territory (up 1.3 per cent), and WA (up one per cent).