Coles sends a huge inflation warning

Coles chief Steven Cain at the Tooronga Village store. Picture: Andrew Henshaw

The great supermarket price-cutting era is well and truly over.

The simple, brutal, question posed by the Coles numbers and CEO Steven Cain’s comments is what sort of inflation is going to replace it? And will it become endemic?

Will it be price rises around the 4-5 per cent of the latest June quarter, which Coles disclosed had happened pretty much right across the shelves – fresh and packaged alike?

Or will it be higher – with suppliers demanding prices hikes and Coles having to recoup its own internal surging costs as well? And with those cost pressures continuing, or worsening, into 2023 and probably 2024 at least as well?

The Coles numbers – and so it will be critical to see what the Woolworths numbers reveal – tell me that right now we are balanced right on the cusp. Get it ‘right’ – and a whole lot of things, mostly outside the control of Coles and Woolies, have to go right to achieve that – and supermarket inflation, so absolutely fundamental to household budgets, might settle back to around 2-3 per cent, after the coming surge washes its way through.

But get it wrong, and the very positive experience of pretty much all of the 21st century so far – where prices fell, maybe only marginally, but fell nevertheless every year – will be replaced by a very unpleasant reality of prices rising in the high single-digits. Either way, best case or worst, you can kiss goodbye to the supermarket deflation.

It’s all too depressingly easy to extrapolate out from what drove the 4-5 per cent inflation, operating as a base for the additional round of price pressures disclosed by Cain, to see a spike up to the 6-8 per cent range, if not indeed higher.

Coles CEO Steve Cain at the Coles Camberwell store. Picture: David Geraghty

Would it be ‘just a spike’ – just for a year, maybe two, if it happened?

Or would it threaten to become endemic? And if so, would it join with higher inflation across the wider economy, petrol and power prices, wage rises, healthcare costs, and on and on?

There’s a far too comfortable assumption – especially in Treasury and the Reserve Bank – that we are just going through an inflation spike.

That inflation will settle back reasonably quickly to sub-3 per cent and the Reserve Bank won’t have to lift interest rates much further than they are now.

Why would we get such a relatively painless and relatively quick success on the inflation front?

I could go through the complex of factors – assumptions, more accurately – driving the Treasury/RBA reasoning, but they really add up a two-word ‘assessment’. Just because.

What happens in supermarkets is so critical to the broader inflation outcome, not just because it – literally – feeds into every household budget.

But because those two decades of regularly falling supermarket inflation was so effective in offsetting the impact of inflation elsewhere in the economy, to deliver the low overall CPI of the last dozen years.

Despite the RBA fretting over too-low inflation, I doubt that you were.

And especially not the two-in-three of you, seeing the value of your home surging at a far, far, faster pace.

With the other one-in-three renters even more thankful for that supermarket deflation.

How much worse would have been ‘everything’ in the economy through the 2000s and 2010s, if we had had rising prices, even if only modestly, in supermarkets every year.

The overall CPI would have been printing at 3 per cent-plus every year and not the 2 and the sub-2 per cent.

Real wages would have fallen more - or we would have had industrial turmoil as workers and unions chased higher wage rises.

The RBA would have been raising interest rates rather than cutting them.

Now we face a very different future with supermarkets adding to inflation.