Yesterday’s CPI reading for the June Quarter of 0.6% should not surprise anyone. Just this week, we have had pronouncements from Australia’s largest retailers – Woolworths, Coles and Harvey Norman – which focussed on the deflation in food and appliances. Indeed, the sales figures from the big food retailers are more than satisfactory given the deflation environment in their markets. If anything, the deflation represented by Coles (Wesfarmers) was significant. Coles claimed lower prices per unit sale than Woolworths, which suggests to us that they discounted heavily in the June quarter in attempt to grow market share. Investors need to consider the sustainability of such a strategy and whether it really will enhance profitability over the medium term. Wesfarmers is a long way behind Woolworths in terms of profitability as measured by return on equity, which is what we look for as value investors.