Excess profits are unlikely to be a significant driver of inflation as business profitability has been declining as inflation has risen, an economist says.
Speaking on the Of Interest podcast, principal economist at the New Zealand Institute of Economic Research, Christina Leung, said businesses have reported cost pressure becoming more intense as inflation has surged.
Earlier, the unprecedented amount of economic stimulus propped up demand and allowed some businesses to pass on higher costs to customers. But as the Reserve Bank has withdrawn that support, it has become much more difficult to pass on costs.
“The fact that with that softening in demand, businesses are at reduced pricing power, but with cost pressures still not moderating enough for them to recoup margin, you are in this environment where operating margins are still quite crunched in.”
According to Reuters, data presented to policymakers at an European Central Bank's (ECB) retreat in Finland showed that companies in the euro zone were increasing profit margins in the face of sharp input cost increases.
The Reserve Bank has said increases in both real profits and wages have contributed to inflation, although the data on wages was much more comprehensive than on profits.
Leung said there may be examples of businesses that have been able to “take advantage, increase prices and bolster their margins”. However, NZIER’s quarterly survey showed profitability has been declining in aggregate.
Most industries are fairly competitive and businesses in those sectors have been eating their margins, rather than risk losing customers.
“If there was a lack of healthy competition within certain industries, then you would tend to see probably more opportunistic pricing behavior take place.”
17 Comments
How sound is this data? Self-reported or verifiable? I think it’s a really, really important question to answer - whether the recent inflation has been driven by profiteering or not/to what extent. At the moment it’s just a political call, if you’re on the Left you assume it’s price gouging and if you’re on the Right you assume it’s excessive Gov’t spending…
It sounds about right to me. 6 months ago I reckon businesses could put prices up to increase profits, but it feels like that has changed now, they can’t increase much even though their costs are going up. People are finding current prices hard to swallow, I don’t think there is much room for more increases. Of course there are some monopoly’s (and duopoly’s!) that can do what they want!
https://australiainstitute.org.au/wp-content/uploads/2022/09/UuGR7-tota…
It's not left or right. Some things are going up, and some are not.
Not sure why they even call it an economy if we consider the amount of debt most nations slash councils carry...Inflation Im thinking the recent Covid saga opened up a door for retailers particularly supermarkets and they have not shut that door since...what Im seeing is product brand rotation and placement being manipulated in such a way that finding your favorite is no longer as easy as it used to be due to the brand rotation whereby the end result is settling on a similar but sometimes more expensive option. I have also noticed the quality of many products has somewhat dissolved or weights have been lightened . If we consider the moves to hike interest rates are tied to this belief that doing so will defeat inflation then it should also be realised there are in fact limits if consideration is given to the mortgage market and those on lower incomes. Clearly rising rates are not affecting the major banks as is evidenced by their regular 'record profits' announcements. Many here will be of the view that Australia pulled back on its hikes due to its mining ability but Im thinking the easing was due to the realisation that increasing pressure on mortgage holders increased the exposure risk to an unacceptable level whereby rapid social slash economic decay would ultimately show itself.
There will be many here that are praying for interest rate hikes to continue on and for the house to come crashing down around mortgage holders via negative equity. Somewhere among it all lays a moral duty and that duty does not just lay with the borrower it also lays with the lender and indeed regulator. Soon enough will come a time when when these paths cross an unknown and it will be the regulator left carrying the can. So how do some firms react in an inflation fighting environment...my guess is they trim the fat so much so that quality goes , they might also restrict quantity ... Does the fight against inflation result in inferior products and services ? The notion that driving the country into a recession will solve all its ails is too simplistic for my likening.... My opinion is doing such just widens the cracks that are already starting to show themselves. Fair to say I think that the rich have zero to fear in such an environment it is the middle and lower that are being thrown into the fire and the fatcats keep on turning record profits.
Excess profits in building have been driven by excess demand and crazy urgency ( and cheap money) driving up prices.
Now its changing quickly. Its already quite easy to get multiple building quotes and even ask for discounts to beat other quotes.. as builders and their suppliers are finding existing projects cancelled less potential customers out there each with less money to spend.
We have a job we are pricing and are getting great prices with fast turnaround.
You can have reckons on this... Or just check the numbers. One of the most reliable methods is to compare total profits, total wages, and CPI. When you do this you see that profits surged after lockdowns relative to wages, we got price inflation from profits and higher import prices, and then wages started to catch up with prices. The profits data from the Stats NZ business ops survey tells the same story.
Profit margins aren't *the* cause of inflation but they contributed.
Yes Jfoe. It's possibly more exacerbated in NZ given that many businesses are price setters not price takers, particularly about those goods and services that enter a representative individual's basket. Compare that to Japan (note: the market depth in the U.S. is far better than in NZ).
The net result is significantly lower price power for suppliers of goods and services in Japan relative to the United States. No matter how differentiated a product or service you offer in Japan, within days or weeks, a competitor will follow suit offering something similar but at a lower price point.
Fun fact: just about every two weeks, a new soft-drink is launched in Japan, and just about every 12-15 years, the equivalent of the entire central Tokyo`s Grade A office supply comes onto the market. Good luck raising soft-drink prices or rent
https://japanoptimist.substack.com/p/whos-afraid-of-inflation-not-japan
Having listened to the podcast now, couple of quick points...
- The business debt data are published regularly, as are the average yields etc. Indeed most of the data is split by business size and you can track bank account balances at sector level. So when Dan asks about impact of interest rates on businesses, you'd expect a major economist to know that business loans not secured on homes are around $120 billion - almost all on floating rates and average yield is about 7% up from 4.5% a year or so ago. So interest costs to business are running $4 billion a year higher (inflationary?!) Escalating interest costs are the primary pressure on input costs for lots of businesses currently.
- A major finding of the survey this quarter was that a minority of firms are still experiencing/ expecting cost increases, but a majority of firms are planning to increase prices. Doesn't that suggest that firms in aggregate are going to increase margins and push up prices? Christina presumably didn't think so - this part of the survey wasn't mentioned at all despite Dan pressing on this point.
- The final points on levels of competition in NZ being good and companies taking a hit on their margins to deal with cost increases is not backed up by any evidence at all (laughable tbh). The data suggests the opposite is more often true. NZIER purports to be an independent consultancy for the benefit of all New Zealanders - but the reality is that it is a business lobby group these days.
- Finally, and sorry to bang the drum again, Christina talks confidently about RBNZ being able to kickstart the economy if things get bad... by dropping interest rates. This is nuts - dropping interest rates in NZ just juices the housing market - it's the absolute worse kind of stimulus. Our success in the future depends on us investing in productive enterprise.
Dropping rates to help industry and business is a good idea, it makes NZ products more competitive on the world stage, but only if a DTI is implemented for mortgages, or a permanent stress test of 8% to 10%.
It is clear that the housing ponzi can't continue, without causing massive harm to the fabric of NZ society. 70% of homeowners apparently don't have a mortgage. So they will not be affected by the correction in a meaningful way. The 5% that have massive mortgages will be unavoidable collateral damage.
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