Australian retail faces rising costs as interest rates and oil prices rise

Retailers operate on tight margins amid cautious consumer spending.

The retail sector in Australia is bracing for a tough year as the Reserve Bank of Australia’s cash rate hike to 4.1% combines with surging global oil prices to increase costs for businesses, the Australian Retail Council (ARC) said.

ARC Chief Executive Officer Chris Rodwell said retailers are facing a challenging environment marked by increasing operational costs and weakening consumer spending power.

“Retail is again facing a double hit — rising supply chain costs from the global oil shock and a rate rise that will likely further squeeze household spending,” he said.

He noted that businesses have been operating on tight margins following years of pandemic-related challenges.

Despite some stabilisation in late 2025 and early 2026, consumers remain cautious, focusing spending on discounts and promotions, which puts further pressure on retailer margins.

Rodwell added that escalating tensions in the Middle East, which have driven up global oil prices, are creating additional cost pressures for retailers.

“Higher interest rates can reduce household disposable income and confidence,” he said. “The risk is retailers face rising cost inputs at the same time consumer spending could slow again.”

Australia’s retail sector generates approximately $444b in annual turnover and employs one in ten Australians, highlighting its significance to the broader economy.

“When the retail sector comes under pressure, the broader economy feels it very quickly,” Rodwell said.

The ARC is also calling on the 2026 Federal Budget to address structural issues, including inconsistent state and territory regulations, which research shows could cost the economy $26b over the next decade.