What 680,000 toy cars tell you about interest rate pain

Citi’s local economist, Josh Williamson, is now forecasting rate rises in November and December, arguing that two more increases are needed if the RBA is to get inflation back to its target range of 2 per cent to 3 per cent by the end of 2025.

“There is no hiding for the bank,” he said after Wednesday’s surprise.

Even if that grim prediction turns out to be wrong, any rate cuts remain a long way off; Bullock and her colleagues will be growing increasingly worried that persistently sticky inflation will start to shift inflation expectations, which have so far remained well-behaved.

Clearly, the rate rise will hit struggling households hard, given the RBA’s own data this month showed that 15 per cent of households already don’t have enough income to cover their monthly mortgage payments and expenses, when hard-to-abate costs such as private health insurance and school fees are included.

But while the central bank remains comfortable about the overall stability of the financial system even if rates move higher, it is clear from Wednesday’s readout from the retail sector that Australian households are becoming distinctly uncomfortable about building cost-of-living pressures.

As he released his September-quarter sales, Woolworths chief executive Brad Banducci called out a sharp increase in violence against his supermarket staff across the country, which he put down to the struggles Australians are having to make ends meet.

“People are under pressure, but it’s inappropriate to express that pressure to our team in store,” he said.

Renters, mortgage holders under pressure

Banducci says customers are obsessed with finding value across all of its supermarket fleet, which Woolworths breaks down into value, core and upper stores.

While it is no surprise that shoppers are increasingly trading down to home brand items (castor sugar and fresh vegetables are apparently the big winners) in value stores, Banducci says that in more affluent areas there is also a notable drift away from more expensive independent grocers and towards Woolworths.

Given Australia’s obsession with housing – and the importance of the mortgage market as a transmission channel for monetary policy tightening – it’s appropriate that Banducci couched many of his observations on consumer health in housing market terms.

The customer segment known inside Woolworths as “savers” are mainly mortgage holders who are feeling the worst of the rate pain, with Banducci citing Sydney’s suburbs as a particular hotspot.

But he and his team are growing more focused on younger singles and couples who rent, and who are also increasingly pulling their horns in. Woolworths is seeing this in its supermarkets, but also via its PFD Food Services businesses, which services the restaurant and cafe trade.

“We’ve been very focused on the mortgage pressure, but actually the rental pressure is the other one that we started to become far more sensitive to,” Banducci says.

There are swings and roundabouts here for Woolworths, of course.

For instance, that shift away from eating out will inevitably lead more consumers to eat at home, and the group’s total food sales in the September quarter were up 6.1 per cent to $13 billion. Same-store sales are up 5.5 per cent, which is much better than the 0.9 per cent fall in like-for-like sales in the June quarter.

Consumers pull back

But Banducci says selling non-food items, and particularly discretionary items, is getting harder.

In Woolworths supermarkets, sales of so-called everyday essentials – think cleaning products and other household items – are falling as consumers pull back and competitors increase their ranges of these goods to improve foot traffic. (Banducci didn’t name names, but Chanticleer imagines Bunnings’ recent push into cleaning products is a good example of the latter.)

In the group’s Big W chain, where sales were down 5.5 per cent in the first quarter, the toy department provides a good example of how consumers are thinking.

Big-ticket items, such as large Lego sets, are out, while smaller treats are in. Banducci revealed the chain sold a remarkable 680,000 toy Hot Wheels cars in the September quarter; at $2 each, or five for $9, this is a gift still within reach.

With just over 60 days until Christmas, Banducci says the Woolworths team’s annual nerves are kicking in, and that anxiety is likely to be shared across the retail sector.

Also on Wednesday, Super Retail Group, which owns the likes of Rebel Sports, BCF, Macpac and Supercheap Auto, reported like-for-like sales growth of 2 per cent for the first 16 weeks of the financial year, down from 20 per cent last year.

CEO Anthony Heraghty was pleased with the results given he is cycling some big numbers from last year. But as at Woolworths, the Christmas period looms as decisive for Super Retail group. And the prospect of two rate rises leading into the festive season must be more than a little scary.

‘We’re getting close to the top of the cycle’

If there was a note of calm on Wednesday, it came from National Australia Bank chief executive Ross McEwan, who spoke on the sidelines of an event looking at potential solutions to Australia’s housing crisis.

While McEwan noted that the inflation number had come in higher than expected, he said it was important to remember the broader picture.

“The trend has been down, which is good. Is it fast enough? Well, I’ll leave that to the Reserve Bank to work through,” he said, noting that NAB’s economists had always expected another rate rise was likely.

For McEwan, there is at least some comfort for households in knowing that the rate rises are close to being done.

“I think people are realising we’re getting close to the top of the cycle, which is what people need to understand, as it then helps them with how they think about all their income, and what’s going out with their expenditure.”

That same event featured Chris Karagiannis, the CEO of Salvation Army Housing in Australia, who revealed that his waitlist for housing now includes a staggering 175,000 families, with the organisation providing relief to Australians every 17 seconds.

To their credit, Bullock and former RBA governor Philip Lowe have been acutely aware of the impact of higher rates on suburban Australia. The prospect of inflicting more rate pain must be heartbreaking, but it’s hard to see what other choice can be made.