Big profits not to blame for inflation, report suggests

Wednesday, 14 June 2023

Two consecutive quarters of economic decline is considered to mean a country has suffered a recession.

While the price of goods and services has risen sharply, big business profits are not to blame for inflation in this country, a new report suggests.

The research by Sense Partners into “greedflation” found that profit margins were lower than pre-Covid.

In the US, “greedflation' – the idea that increased profit margins are responsible for higher prices – has shifted from a dismissed fringe theory to an issue the Federal Reserve has addressed.

In Australia, a think tank found profits were a big driver of recent inflation. But these findings were contested and the Reserve Bank of Australia did not find abnormal profit margins outside the mining sector.

Sense Partners used Statistics New Zealand data and found over the three years to December 2022, prices rose by 14%. Of that, 71% of the price increase could be attributed to input costs, 15% to an increase in labour costs and 14% to an increase in gross profits.

Reserve Bank deputy governor Christian Hawkesby discusses inflation in February.

Sense Partners economist Shamubeel Eaqub said there was no evidence of widespread increases in profit margins driving up inflation in New Zealand.

The analysis included data up to December 2022, which was the latest available at the time of analysis.

The data would be updated after this week’s GDP release, but Eaqub did not expect a significant shift in greedflation.

“Shrinking margins on average suggest businesses are finding it harder to pass on costs, because consumers are being careful. As a result, we have increasing stress on businesses at the margin.”

Corporate insolvencies were at the highest level since 2015 and Centrix reported rising financial pressure in some sectors, in particular construction, he said.

Economist Shamubeel Eaqub says the research found greedflation did not exist in New Zealand.

He said there had been periods where profit margins had grown substantially, especially after the mid-1980s economic reforms through to around 2000.

“In that period more of the returns from business accrued to profits than labour. It was also a period of significant economic change in New Zealand,” he said.

The report was commissioned by BusinessNZ and director of advocacy Catherine Beard said it had observed a growing conversation overseas about whether firms were using the cover of Covid and inflation to create super-profits for themselves.

'This report uses data from StatsNZ to show that increased profits are not driving inflation and that profits are actually leaner than they were pre-Covid.

'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.'