Interest rate nightmare confronts discretionary retailers

Take a look at the below chart from the Reserve Bank of Australia’s (RBA) latest Statement of Monetary Policy. It shows that grocery prices are rising at the fastest pace in decades, up around 10% year-on-year:

Discretionary retail inflation is also rising at a solid clip, up 7% over the year.

The primary reason why the RBA has lifted interest rates so aggressively is obviously to slow demand and household consumption, to take heat out of the economy (and inflation).

Yet, essentials are exactly that, and households will continue to spend on these items regardless of rate hikes.

The big hit to spending will land on discretionary retailers who will effectively have to bear the brunt of rate hikes and households’ reduced budgets.

I would not want to be in the discretionary retail space right now. For them, recession is coming.