Higher minimum wages and AI surge pushing corporate Australia into inflationary squeeze

Corporate Australia is being caught in an inflationary squeeze as higher minimum wages lift labour costs while the race to invest in artificial intelligence drives up spending on technology, data centres and skilled workers.

The warning comes after Ray David of Airlie Funds Management met with management teams at 50 companies in August, with executives repeatedly pointing to multiple cost pressures that could weigh on profit margins.

“A common theme across most companies we talk to is general cost inflation,” said David. “Rising labour rates are broad based. It partly reflects minimum wage awards coming through and retail companies are telling us the cost rises are coming at the same time as a weaker sales environment.”

JB Hi-Fi sales fall for first time in 12 years

Last week electronics retail giant JB Hi-Fi shocked investors by warning its Australian sales fell for the first time since 2014 in July.

Its chief executive Nick Wells blamed higher interest rates and inflation for eroding consumers’ spending power as trillions of dollars of investment in AI pushes up the cost of computers and mobile phones.

“We have seen very material price increases in PCs. In some brands, that can be more than 50 per cent price rises, and as we talked about previously, the major driver is the increase in cost of memory.

“The demand for hardware used in AI data centres is sucking up a lot of the memory supply,” Mr Wells said.

Shares in the retailer have plunged from $81.71 to $69.70 since it reported its results and warned of problems in the economy.

On July 1, the National Minimum Wage increased 4.75 per cent to $26.44 an hour to push up core costs for businesses across retail, hospitality, childcare, aged care, tourism, and parts of healthcare.

Large ASX-listed fast-food chains such as Guzman y Gomez and Domino’s Pizza, as well as privately owned cafes, now face a choice between raising menu prices and accepting lower profit margins.

“Then there’s freight costs,” said David. “We had a big spike in fuel prices in the June quarter. Anyone with exposure to transport costs is facing higher bills.

“So generally it’s an inflationary environment and all the companies we speak to are having to navigate that. Some are thinking about how do we use AI to improve productivity, or seek out savings as margins are under a little bit of pressure.”

Macquarie cuts companies’ profit outlook

The worries about rising inflation have prompted Macquarie Australia Research to cut its earnings per share growth forecasts for ASX companies, with earnings per share growth now expected to reach just 4.9 per cent in the 12 months to June 30, 2027.

This is half the expected average profit growth rate of 9.8 per cent over financial year 2026.

Since the start of the August reporting season, Macquarie has cut its average profit growth forecasts by 2.3 per cent as a series of company results and management outlooks disappointed investors.

The S&P/ASX 200 is up just 2.1 per cent over the past year. The he gains have been heavily concentrated in the materials sector, which has advanced 47.3 per cent on the back of strong performances from miners.

Other sectors, including financials, technology, and consumer discretionary have all fallen over the past year as high interest rates and inflation weigh on the economy.

Macquarie said Australian investors could instead look towards companies with exposure to the US economy that are benefiting from the broader adoption of technologies linked to artificial intelligence.

US companies have continued to deliver strong profit growth, helping drive Wall Street to record highs in August, although Macquarie warned political volatility could trigger a pullback.

“Given September tends to be a volatile month for equities, especially in midterm election years for a second term US President, we still think October will likely be a better time to add risk,” the bank said. “It’s better to buy when sentiment is less positive or even negative and so far this year this has only occurred briefly in March.”