What's the outlook for ASX 200 retail shares as inflation begins to bite?

High earners are expected to keep spending while those on lower incomes may opt to save.

Key points
  • Cost increases for essential goods and stagnant wages for some Australians have separated the haves and have-nots further
  • UBS says lower and middle-income earners could tighten their purse strings while those earning $120,000 or more a year will keep burning through their pandemic savings 
  • Aanalysts have raised their forecasts for the official cash rate from 2.85% to 3.1% 

Some Australians could slow their spending in the months to come amid stagnant wages and cost increases for necessities, according to a UBS analyst.

As reported by The Australian, UBS analyst Shaun Cousins says lower and middle-income earners could tighten their purse strings. But those who earn $120,000 or more a year will keep burning through the savings they accumulated during the pandemic.

Notably, Cousins says this means retailers that attract higher net worth clientele, such as S&P/ASX 200 Index (ASX: XJO) favourites Harvey Norman Holdings Limited (ASX: HVN) and Lovisa Holdings Ltd (ASX: LOV), could be less affected by fiscal tightening.

The other side to this is that more value-oriented ASX 200 retailers like JB Hi-Fi Limited (ASX: JBH) could see a drop in sales as bargain hunters start to feel the bite of a rising cost of living.

The effects are unlikely to be felt immediately. But they could start to add up from November onwards and culminate in a slowdown in February next year.

Cousins said:

The Australian consumer is facing significant headwinds from the rising cost of living across energy, food, fuel and interest rates, with house prices falling.

These headwinds have yet to weigh on spending with the strong labour market – low unemployment and rising wages despite falling purchasing power – and elevated recent household savings key supports as the consumer returns to traditional spending patterns and engages in catch-up spend after difficult years with Covid.

Cousins continued:

We fear a slowdown in spending from November onwards, with the fuel excise, cumulative impact of the rising cost of living. If the consumer remains buoyant in November we suggest Christmas will also be strong with the prospect spending slows from February 2023 onwards as the rising cost of living headwinds bite.

A young woman in a shop wearing black pants and a blue blouse looks at a white shirt off the rack

Image source: Getty Images

Consumer confidence rises along with the official cash rate forecast

The vast majority of people surveyed as part of the ANZ Roy Morgan Consumer Confidence index are positive about the prospects for their jobs and the economy at large. This may entice high-income earners to keep spending at premium retailers, The Australian reported.

The index gained 0.4% last week and currently stands at 86.

However, some dark clouds could form over this important benchmark. ANZ Roy Morgan head of Australian economics David Plank believes the rise in consumer confidence results from a "misplaced" interpretation of RBA commentary that the next rate hike in October may not be as severe.

Plank said:

This may indicate that people with mortgages have taken comfort from the recent commentary that the RBA might scale back the size of rate increases in October. We think that commentary is misplaced and expected another 50bp from the RBA in October. This might come as something of a shock for those with mortgages.

Meanwhile, UBS raised its expectations for the cash rate peak to 3.1% from 2.85%. This suggests further work is needed to get inflation back under control, the article said.

The cash rate is currently 2.35%.

Motley Fool contributor Matthew Farley has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Harvey Norman Holdings Ltd. The Motley Fool Australia has positions in and has recommended Harvey Norman Holdings Ltd. The Motley Fool Australia has recommended JB Hi-Fi Limited and Lovisa Holdings Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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