'Greedflation' not evident in NZ, says economist
Input costs are the biggest contributor to higher prices, indicating businesses are not capitalising on inflation to make more money, a New Zealand business advocacy group says.
A report commissioned by BusinessNZ and conducted by economics consultancy Sense Partners investigated whether there is evidence of “greedflation” in New Zealand – a term that it said refers to increased profit margins driving up prices of goods and services.
BusinessNZ director of advocacy Catherine Beard (pictured above left) said that the question of whether companies were using COVID-19 and higher inflation as a cover to create increasing profits was a discussion point overseas.
Conducted using Statistics NZ data, the report findings showed that New Zealand business profits were “leaner” than they were pre-COVID, indicating that increased profits were not driving inflation.
"As this report details, in New Zealand the bulk of price increases for the non-financial sector of the economy are made up of the cost of inputs - 75%,” Beard said.
Wages and profit made up the remainder of the price increases, she said. She also noted that input prices were “a much larger driver of output prices” than profits.
"Our members tell us the cost of doing business has increased – in fact some sectors are making less and even entering negative profit territory," Beard said.
Inflation reached 6.7% in the year to March, the Reserve Bank saying in its May monetary policy and official cash rate statement that inflation is expected to continue to decline from its peak.
Sense Partners economist Shamubeel Eaqub (pictured above right) said that by decomposing price increases for the non-financial sector of the economy, it was found that 75% of the inflation in the three years to 2022 came from the increase in the cost of inputs of goods and services. The remainder was evenly split between wages and profits.
“We found no evidence of widespread increases in profit margins driving up inflation in New Zealand. It is an imported narrative and not supported by the evidence,” Eaqub said.
Using quarterly industry sector data from Statistics NZ, Sense partners analysed profit margins from 2017 to 2022, which captured the period before and after COVID-19.
The data was combined with real production gross domestic product data to calculate sale price per unit.
Analysis showed that profit margins for the measured non-financial sector averaged 14.7% pre-COVID and were 12.7% in 2022.
Over the three years from the December 2019 quarter to the December 2022 quarter, Sense Partners analysis showed that prices rose by 14% (an average of 4.6% per year), with 71% of the increase attributed to the increase in input costs, 15% to an increase in labour costs and 14% to an increase in gross profits.
Sense Partners confirmed that overall, recent inflation in New Zealand was largely driven by input costs, not wages or increasing profit margins.
According to the report findings, the construction sector experienced one of the biggest rises in inputs. Prices rose by 22% over 2017 to 2022, with 70% due to input costs. Although profits edged higher per unit of sales, Sense Partners confirmed that profit margins (the share of sales going to profits) fell slightly.
