Australian retail businesses face “simultaneous attacks on both flanks” as rising costs and weakening demand threatens to smash margins.Deloitte Access Economics partner and principal report author, David Rumbens said a “pincer movement” was hitting the local businesses, which will ultimately lead to slower sales. “In our baseline scenario retail turnover is expected to grow by 1.8 per cent in 2026, down from 2.3 per cent in 2025.”“Yet the risks are to the downside and should the crisis in the Middle East extend and amplify, consumer spending could see very little growth over the rest of 2026.”On one hand, input costs will rise due to the US and Iran war, which will directly add 2.1 per cent in costs due to rising fuels, gas, fertiliser and plastic prices.Adding to retailers’ pain is slowing consumer sentiment, which temporarily dipped to its lowest point in five decades. Mr Rumbens said retailers are facing a simultaneous attack on both sides.“The Middle East conflict is pushing up costs as the prices of key inputs including fuel, energy, plastics and fertiliser rise,” he said. “At the same time, the rising cost of living is once again squeezing household budgets, dampening the outlook for consumer spending.”Official figures released by the Australian Bureau of Statistics show yearly headline inflation fell from 4.6 per cent in March to 4.2 per cent in April.But the all important trimmed mean inflation rate – which the RBA watches because it strips out volatile and seasonal items – rose to 3.4 per cent for the 12 months to April, showing underlying price pressures are still in the Australian economy.This was due to the Australian government temporarily halving the fuel excise and giving back the GST. Starting April 1 motorists have been saving 26 cents a litre directly through the fuel excise and around 5.7 cents a litre through returning the GST.This measure will run out on July 1 2026. Mr Rumbens said the recent run up in inflation wiped out all the real wage gains Australian households had seen in 2025, with real wages down 1.3 per cent in the year until March.This in turn is predicted to impact retail sales. Overall, Deloitte Access Economics expects discretionary spending growth will slow from 2.5 per cent in the year to December 2025 to 0.7 per cent in the year to December 2026. Non-discretionary spending on essentials is expected to increase from 2.5 per cent to 3 per cent over the same period but may subsequently pull back as households look to save money in any way they can.“Discretionary spending is likely to weaken further as the lagged effects of interest rate rises continue to flow through to household budgets, elevated inflation erodes consumers’ purchasing power, and uncertainty surrounding the Middle East conflict persists,” Mr Rumbens said.