Australian retailers are caught in a pincer movement. Consumer spending is slowing, real wages have fallen back into negative territory, and the cost of essentials is running at 4.7% — well above the headline inflation rate of 4.0%. The Middle East conflict is adding an estimated 2.1% to the retail cost base through higher fuel, gas, and fertiliser prices. For businesses that depend on discretionary spending, the window to adjust is narrowing.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
The numbers tell a story that most business owners already feel. Households with an average-sized mortgage now need an extra $350 per month just to keep up with higher repayments, following three interest rate increases in 2026. Real wages are back in negative territory, down 1.3% year to March. The March inflation print effectively wiped out every real wage gain Australian households had seen in 2025. That cash doesn’t disappear — it just stops flowing toward the businesses that used to rely on it.
Deloitte Access Economics rarely adopts this downbeat a short-term outlook. The economy is structurally exposed due to weak productivity, stretched household balance sheets, and a constrained supply side. And the inflationary pressures hitting businesses aren’t expected to ease quickly. Here’s what you actually need to know.
When people talk about a cost of living crisis, they usually mean the gap between what households earn and what they need to spend on basics. For businesses, the same crisis looks different — it’s a gap between what customers can spend and what it costs to keep operating. The two sides are connected, and they are tightening from both ends.
What I tend to notice in periods like this is that businesses either overcorrect — cutting everything including the things that keep customers coming back — or undercorrect, hoping the numbers will improve on their own. Neither approach works well when the data points to a prolonged squeeze.
How consumer spending patterns are shifting under pressure
The most immediate change for businesses is not about how much people spend, but what they spend on. Non-discretionary spending on essentials is expected to increase from 2.5% to 3.0% in the year to December 2026, while discretionary spending growth slows to 0.7%. That gap is where the pressure lives.
The ABS Living Cost Indexes show which households are feeling the most strain. Housing costs rose across all household types, driven by electricity prices and the unwinding of energy rebates. Medical and hospital services rose due to the annual reset of Medicare Safety Net and PBS thresholds on 1 January. Automotive fuel prices rose roughly 5% in the March quarter alone, driven by the Middle East conflict.
For businesses, the customer mix matters. Employee households saw living costs rise 1.4% in the March quarter and 2.6% annually. Age pensioner households saw a 2.5% quarterly rise and 5.2% annually. Self-funded retirees saw the smallest quarterly rise at 1.1% but still 3.8% annually. A business near a retirement community faces a different demand pattern than one in a commuter suburb with young families carrying mortgages.
The Living Cost Indexes also reveal that pensioner and beneficiary households recorded the largest housing cost increases — electricity makes up a much higher proportion of their expenditure. These households are cutting back on everything non-essential first, and they make up a significant portion of the customer base for many local businesses.
Where business owners misread the situation
Most of the mistakes I see in this environment come from treating the cost of living crisis as a temporary dip rather than a structural shift. The data suggests otherwise. Here are the most common gaps between what business owners assume and what the research actually shows.
Treating the slowdown as cyclical rather than structural
The temptation is to wait it out. But the Deloitte forecasts show the economy growing at 1.3% in 2026-27, down from earlier projections of 1.9%. Underlying inflation is expected to peak in early 2027. That’s not a quarter or two of softness — it’s a multi-year adjustment. Businesses that wait for demand to return without adjusting their cost base or product mix will find margins have permanently shifted.
Cutting prices across the board to chase volume
When households are spending $350 more per month on mortgage repayments, a 10% discount on a non-essential item doesn’t make it affordable — it just makes the margin thinner. The data on discretionary spending growth dropping to 0.7% tells you that demand is not elastic enough for broad price cuts to work. Targeted pricing on essentials or bundled value offers tends to hold up better, but only if the cost base supports it.
Ignoring the essentials rotation in inventory strategy
Non-discretionary spending is still growing at 3.0%, but that growth is concentrated in housing, health, transport, and food. Businesses that continue to stock the same discretionary-heavy mix without adjusting for the essentials shift will see inventory turn slower and carrying costs rise. The ABS data shows food and non-alcoholic beverage costs rose 6.1% for pensioner households in the March quarter — that’s not a category that’s shrinking, but it’s also not one where margins are easy to protect.
Freezing all investment because of uncertainty
This is the most counterintuitive mistake. The research shows business investment has strengthened over the past six months, but it’s narrow — concentrated in information media and telecommunications, where capital expenditure almost doubled and equipment investment almost tripled. That investment is going into data centres, cloud computing, and AI infrastructure. The equipment is mostly imported, which limits near-term productivity gains, but the pattern is clear: the businesses that are investing in cost-saving technology and productivity are positioning themselves ahead of the recovery. Freezing everything means falling behind.
If there’s one area where I’d start if I were running a business right now, it’s on the cost side — not cutting indiscriminately, but looking at where technology or process changes can reduce the cost of serving each customer. The business advisory services available through some platforms can help model the numbers before making that call.
What businesses can actually do about the cost of living squeeze
The research points to a few practical moves that are grounded in the data rather than guesswork. None of them are quick fixes, but each addresses a specific pressure point the research identifies.
Rebalance your product mix toward non-discretionary categories
With essential spending still growing at 3.0% and discretionary spending slowing to 0.7%, the direction of travel is clear. Businesses that can shift even a portion of their offering toward everyday needs — food, household supplies, health-related products, transport-adjacent services — will capture more of the available consumer dollar. The ABS data shows food and non-alcoholic beverage costs rose 2.7% for employee households in the March quarter. That’s a category that holds up better than most.
Target the right household segments with the right message
Different customer groups are experiencing the crisis at different intensities. Age pensioner households saw living costs rise 5.2% annually — the highest of any group. Self-funded retirees saw only 3.8%. Employee households are in the middle at 2.6%. The marketing message that works for a retiree with a paid-off home won’t land with a family carrying a mortgage. Segmenting your customer base by how much their costs have risen, rather than by demographics alone, changes which offers make sense.
Lock in cost savings through technology and process changes
The data shows that business investment is growing, but only in narrow areas. For most businesses, the opportunity is in tools that reduce labour costs, improve inventory management, or automate repetitive tasks. The 2.1% increase in the retail cost base from the Middle East conflict is a direct margin hit — offsetting it requires finding savings elsewhere. For businesses with remote teams, securing that setup with a business VPN can reduce IT overhead and improve productivity at the same time.
Prepare for the interest rate path and plan cash flow accordingly
The RBA is expected to raise rates by 25 basis points in August, followed by a 12-month pause before easing begins. That means higher borrowing costs for at least another year. Businesses with variable-rate debt or lines of credit should model their cash flow at the higher rate now, not later. The $350 monthly hit to the average mortgage-holding household also applies to business loans — the cost of capital is going up, and it’s not coming down quickly.
Watch for the recovery signals in 2027-28
Underlying inflation is expected to peak in early 2027 before returning to target in 2028. The unemployment rate will average 4.9% in 2026-27 and may peak at 5% across 2027-28, before falling slightly as lower inflation and interest rate cuts stimulate the labour market. The businesses that survive the squeeze will be positioned to benefit when consumer confidence returns — but that return is not expected until late 2027 at the earliest. Planning for a two-year horizon rather than a two-quarter horizon changes how you think about hiring, inventory, and pricing.
For businesses that need to make structural changes to their model, exploring ecommerce platforms that reduce the cost of reaching customers directly can be one way to bypass some of the retail margin pressure. The shift online didn’t end with the pandemic — it’s accelerating as households look for better prices.
Frequently asked questions about the cost of living crisis for Australian businesses
How long is the cost of living crisis expected to last in Australia? ▾
Which business sectors are hit hardest by the cost of living crisis? ▾
Should I raise or lower prices during the cost of living crisis? ▾
How does the Middle East conflict affect Australian businesses specifically? ▾
Are there any business investments that make sense during the downturn? ▾
How does the cost of living crisis affect small businesses differently from larger ones? ▾
Why the next two years will separate businesses that adapt from those that stall
The data from Deloitte Access Economics and the ABS points to a prolonged period of compressed consumer spending and elevated business costs. Underlying inflation won’t return to target until 2028. Interest rates are rising, not falling. The unemployment rate is edging up toward 5%. And the Middle East conflict adds a layer of cost pressure that no single business can control.
What the research also shows is that the businesses investing in productivity, rebalancing their product mix, and planning for a two-year horizon are the ones most likely to emerge in a stronger position. The gap between those that adapt and those that wait will widen over the next two years.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read Navigating Supply Chain Disruptions in Australia.
Sources and Further Reading
Inflationary Pressures: Navigating Economic Uncertainty in Australia — A deeper look at how inflation is affecting business operations and what tools are available to manage the uncertainty.
Unlocking the Talent Puzzle: Australia’s Workforce Challenges and Solutions — How labour market shifts and real wage declines are reshaping hiring and retention strategies.
Deloitte Access Economics (2026). Business Outlook, June quarter 2026. 🔗
Deloitte Access Economics (2026). Retail Forecasts. 🔗
Australian Bureau of Statistics (2026). Selected Living Cost Indexes, Australia, March 2026. 🔗
Australian Bureau of Statistics (2026). Consumer Price Index, Australia. 🔗
