Grocery prices and mortgage rates are expected to continue rising in 2023. Photo / Getty Images
Grocery prices and mortgage rates are expected to continue rising in 2023. Photo / Getty Images
Fears that New Zealand businesses are adding to high inflation by boosting profit margins are unfounded, according to new research commissioned by Business NZ and conducted by Sense Partners.
“Greedflation” alludes to the practice of using an inflationary environment as a cover to extract higher profits.
Sense Partners economist ShamubeelEaqub notes that greedflation has become a hot topic in the US and Europe, where corporates have been accused of price gouging.
“Record margins in the US have been linked to increased inflation,” the report said. “Firms are taking advantage of the inflationary period to boost profit margins.”
But the study found no evidence of greedflation in New Zealand and that, on aggregate, profit margins - for the non-financial sector at least - have fallen.
“We found no evidence of widespread increases in profit margins driving up inflation in New Zealand. It is an imported narrative not supported by the evidence,” the study concludes.
Sense analysed quarterly financial data for the non-financial sector published by Stats NZ. It looked at the period from 2017 to 2022 to compare pre-Covid and post-Covid trends.
This data and real production GDP data were used to calculate the sale price per unit which “adds up to the increase in cost inputs, spend on labour and gross profits”.
The analysis found that profit margins for the non-financial sector averaged 14.7 per cent before Covid and just 12.7 per cent in 2022.
By analysing StatsNZ data the study was able to “decompose” price increases from December 2019 to December 2022 across industry sectors.
It broke price increases down into component shares of input costs, labour costs and profits.
“We found that over the three years to December 2022, prices rose by 14 per cent (or an average of 4.6 per cent per year),” the report said.
From there it found that 71 per cent of that price increase could be attributed to an increase in input costs, 15 per cent to an increase in labour costs and 14 per cent to an increase in gross profits.
“The industry breakdowns show that price increases have varied considerably across sectors. In sectors with the highest inflation, input costs were the biggest contributor, not wages or profits.”
The sectors that recorded the biggest price increases were mining (28 per cent), manufacturing (24 per cent), transport, postal and warehousing (25 per cent) and construction (22 per cent).
Shamubeel Eaqub found no evidence of "greedflation".
Business NZ director of advocacy Catherine Beard said the study was commissioned because the organisation had “observed overseas a growing conversation around whether firms are using the cover of Covid and inflation to create super-profits for themselves”.
But the data behind the study painted a clear picture of contributing factors to inflation, she said.
“It’s clear that input prices are a much larger driver of output prices than profits are.
“Our members tell us the cost of doing business has increased - in fact, some sectors are making less and even entering negative-profit territory.”
The study notes that a similar study across the Tasman, by the Reserve Bank of Australia, found no evidence of widespread greedflation there either - with profit margins outside of the mining sector remaining within historic norms.
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
