Chart of the Week: Looking past the oil shock to find consumer opportunities
Shoppers are being hit by double whammy of oil and rising rates.
This week’s chart comes from Johannes Faul with insights from the latest industry pulse for Australian Retailers.
Oil and rates dampen the near-term outlook
Households are spending more on interest payments and fuel. And higher fuel prices are driving up inflation for a variety of products and services. For instance, supermarkets lifted their private-label milk prices by over 10% in late April. We estimate the combination of lifting cash rates to 4.6% and 120 days of higher fuel prices could fully erode real household spending growth. But our scenario assumes no changes to fuel demand and excludes government stimulus. And it ignores household reactions.
Households are saving 7% of their incomes, up from 2% during the height of the inflation induced cost-of-living crisis in 2023. This starting point gives some consumers the option of maintaining their living standard by continuing to spend and saving less. Lowering the savings rate by about 2 percentage points could negate the impact of oil and rates on near-term spending. Monthly bank data for March 2026 suggests shoppers are taking this stance, with consumption growth excluding fuel even accelerating on February.
Undoubtedly, uncertainty is elevated. However, we think fuel prices will eventually moderate, reversing the current headwind into a tailwind for spending. While monetary policy cycles generally last longer, the RBA’s setting is restrictive, and a more neutral stance could eventually boost spending. We believe near-term woes are weighing on discretionary retailing names, particularly smaller-cap stocks. But with current headwinds unlikely to last, we see plenty of opportunity for long-term investors willing to look past the oil shock.
Cyclicals better value than defensives on average
On average, defensive retailing stocks are proving resilient as inflation concerns mount. Woolworths screens expensive after quickly reinvigorating its sales momentum But it’s our preferred supermarket exposure on valuation grounds.
Cyclicals are mostly cheap. If households decide to taper their spending, discretionary retailers like Super Retail and Harvey Norman are likely to feel the brunt. But looking past a temporary spike in fuel prices, we think their earnings potential is unimpeded.
