That's what has occurred in the past when the currency has lost value. The weaker dollar pushed up the price of imports and businesses passed it on to customers. The falling price of clothing and footwear reflects increasing competition among retailers, the RBA says. This time around, however, things have been different. Since mid 2013, the prices of clothes and shoes are down 3.5 per cent and they haven't been this cheap since 2000, according to the consumer price index (CPI), despite the dollar's slide over this period. And clothes are just one example. Many of the imported items stacked on retailers' shelves – whether it's clothes, appliances or other electronic goods – are also surprisingly cheap when compared to the dollar's move. So, what's going on?

Some recent research from the Reserve Bank's Alexander Ballantyne and Sean Langcake sought to get to the bottom of the surprisingly low rate of retail inflation. Their findings aren't good news for domestic retailers – more on that later. Retail inflation has been surprisingly weak in recent years. Credit:Louise Kennerley First, it's worth pointing out that surprisingly cheap clothes are representative of a broader economic trend: very low imported inflation. About 40 per cent of the CPI is made up of "tradables" – goods for which the price is set on world markets. Of the "tradables" basket, about 60 per cent is made up consumer goods such as clothes, appliances, food and alcohol. In other words, tradable or imported inflation has a large impact on the prices we all pay. The RBA's economists set out to find out why retail inflation, which makes up a big share of "tradable" inflation, is so weak. They did so by looking at a number of possible explanations for all that cheap clothing on the shelves.

One possibility is that businesses have changed how they pass on changes in the exchange rate to their customers. But after building a statistical model that also took into account changes in other costs that retailers face, they found exchange rate "pass-through" behaviour had probably not changed. It's also possible that the goods being sold are simply being produced more cheaply. This might occur because manufacturing is shifting to lower-cost countries, or because of the excess stock being produced in Chinese factories. However, that's probably not the reason for low retail inflation, either. Indeed, the RBA's talks with retailers suggested that "cost of goods sold" – the price paid by wholesalers – has actually risen in recent years. Instead, the paper concludes a more likely reason for very low retail competition is an outbreak in competition. You can see clear evidence of this when you walk around town or in a mall: the expansion of Germany's Aldi in supermarkets, or Zara, Topshop and H&M in clothing.

Less visibly, retailers are feeling the squeeze from the digital revolution, which forces them compete with overseas and domestic online stores, and allows consumers to instantly check the price of something on their smart phone. Clothing was especially affected by this wave of competition, the RBA said. While inflation has gradually started to rear its head again for goods such as household appliances, furniture, clothing was the "clear exception". "Liaison suggests that competition for market share between established firms and new foreign entrants has been particularly strong in this segment," the report said. With little hope of putting up prices, many retailers are being forced to rethink their approach. Some firms are being forced to accept lower profit margins, but are trying to sell a higher quantity of goods. The idea of this tactic is that the business will gain greater economies of scale, which should protect their returns. However, it is hard to sell households more and more goods at a time when wages are growing very slowly, so many shoppers are watching their pennies.

Retailers are also trying to make shops more efficient or lower cost, such as through self-serve checkouts, or negotiating cheaper rents. Faced with a wave of competition, many retailers appear to be losing what's known as their "pricing power" – the ability of a company to be a "price-maker", rather than accepting the prices set in a competitive market. Loading For a big consumer brand, this loss of pricing power hurts, as profit margins are crunched unless the business can offset some of the squeeze. For consumers, however, the wave of competition in retail is shielding us from feeling the pain of a weaker dollar when we're at the shops.