Rising inflation: what can we expect from the Australian consumer?

The Australian economy is expected to maintain some momentum in 2022, with annual real GDP growth forecast at 3.5%. This will be particularly facilitated by the reopening of Australia’s borders to international travellers, which will both help tourism and alleviate some supply chain disruptions.

However, inflation is likely to be a challenge for Australians, driven by a combination of domestic and international factors. Inflation is largely due to government stimulus payments during the pandemic, supply chain constraints caused by border closures, as well as the more recent impact of the war in Ukraine, which has caused a major spike in oil prices, which will ripple through all aspects of the economy, ultimately leading to higher prices for consumers and increased operating costs for businesses.

Damage from major floods in the summer of 2021/2022 and crop failures following heavy rains in Queensland and New South Wales have impacted food supplies and prices have soared. Limited coal-fired power generation is expected to cause production disruptions and drive up prices further. The Reserve Bank of Australia first raised the official exchange rate in May 2022 and again in July 2022, which is expected to pose significant mortgage challenges for average Australians.

A tight labor market caused by the paralysis of immigration since the outbreak of the pandemic in 2022 is also contributing to inflationary pressures, with wages remaining on an upward trajectory. This means that inflation has already exceeded the central bank’s target rate of 2-3% for 2022.

Quarterly forecast for Australia

Source: Euromonitor macro model, last update: 04 July 2022

Prices in March

According to savings and consumer data from Euromonitor International, the consumer price index rose 2.1% in the first quarter of 2022 and 5.1% in the 12-month period to in March 2022. This is also seen in Euromonitor’s Via pricing system in key groups. in the CPI basket, such as packaged food.

The median unit price (100g) of packaged food Source: Savings and Consumers, Via

The median unit price (100 g) of packaged food increased sharply, by 15.0%, from January 2021 to March 31, 2022. For fresh food it increased by 6.9%, soft drinks increased by 26.7% and hot drinks by 66.5%.

With nearly 40% of Australian budgets allocated to non-discretionary items such as food, soft drinks and accommodation, inflation will impact the purchasing power of Australians over time. Additionally, low-income families will be worse off than other income brackets, as their source of income has been impacted the most during COVID-19.

Everyday objects become luxuries

As prices rise, consumers’ ability to spend on discretionary items is expected to fall, as the rising cost of living turns everyday items into luxuries.

Source: Euromonitor International Snacks Forecast Model

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Source: Euromonitor International Staple Food Forecasting Model

As Euromonitor International’s forecast model shows, among the different packaged food categories, confectionery and savory snacks have a high price elasticity of 0.86 and 0.78 respectively, meaning Australians are more sensitive to variations in the price of these products. This is not surprising, since these are not necessities like commodities, but rather spontaneous and impulse purchases. Most staples, such as breakfast cereals, tend to be comparatively more inelastic, and consumers are less likely to ignore them if they cut back on spending, as they are considered essentials. For basic food items, consumers have limited substitution options and are therefore willing to sacrifice other discretionary spending to afford these items.

Macro scenario: global stagflation

Staple food forecasting model

Source: Euromonitor International Staple Food Forecasting Model

However, in a pessimistic scenario of global stagflation, the expectation of stagnant economic growth and inflation should lead to a sharp drop in sales volume in categories such as bakery products. As the charts above show, commodities such as baked goods are experiencing a high elasticity of 0.83 in Australia, amid rising prices due to the impact of the war in Ukraine and bans wheat export restrictions imposed by India.

Restricted purchasing power and industry responses

Inflation and the soaring cost of living, including energy and mortgage bills, are expected to get worse before they get better. This will have an impact on the restaurant business, as consumers become sensitive to higher prices for restaurant meals and, with retail prices rising, consumers will increasingly seek the best value for money. Consumers are likely to opt for private label products to save on food costs, as affordability becomes more crucial for Australians than staying loyal to their beloved brands. As Australians seek good value for money, private label products from retailers such as Woolworths and discounters like Aldi will be better equipped to meet the demand for affordable essentials. Major retailer Woolworths is implementing price freezes on household essentials such as eggs, oats, flour and rolls, among others, until the end of 2022 to help ease the pressure of the rising cost of living for Australian consumers. To compete with private label ranges when consumers are price sensitive, some other players reduce pack sizes to maintain the same price, coining the term “shrinkflation”.

In a developed economy like Australia, consumers are expected to continue buying groceries, given that they are reasonably priced, although the reduced frequency of price promotions is expected to have a impact on grocery shopping for Australians. However, despite inflationary pressures and the rising cost of living, sustainability is a key feature that consumers consider when making product choices. Therefore, it is imperative that industry players continue to drive innovation and deliver sustainably produced and packaged food choices.

For more information, watch our video Tracking Product Prices and Availability to Monitor Inflation.


About Chris McCarter

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