Last month, Sense Partners wrote a report for BusinessNZ on 'greedflation' in New Zealand. As the National Business Review reported earlier this month (paywalled), when the report was released publicly:
Businesses don’t appear to be using Covid-19 and rampant inflation to cover for ‘super profits’, according to a new report out today.
The research by Sense Partners, commissioned by BusinessNZ, assessed whether ‘greedflation’ was happening in New Zealand.
Greedflation in New Zealand? An imported narrative found while costs have gone up across the board, ‘inflated’ profits were not the catalyst.
You can read the Sense Partners report here. Unlike the flaky PriceSpy analysis that I discussed yesterday, Sense Partners actually looked at how profits and input costs changed over time. They describe the methods very briefly in the report:
We can get a better understanding profit margins and components of price increases from detailed quarterly financial data published by Statistics New Zealand... This data is available for non-financial private sector firms.
We can use this data to analyse profit margins from 2017 to 2022, allowing us to compare pre- and post-Covid periods.
We can also use this data combined with real production GDP data... (a good proxy for quantity unit of output) to calculate sale price per unit, which adds up to the increase in cost of inputs, spend on labour and gross profits.
While gross profits will generate taxes and there will be other expenses such as interest payments or money to cover maintenance for example, this gives us a comparable approach to understanding the drivers of inflation.
The key data come from Statistics New Zealand's Infoshare service here. [*] It provides data by industry on sales (operating income), purchases and operating expenditure, salaries and wages, and operating profit. By comparing the changes in these categories over time, we can get a sense of how much changes in prices (which Sense Partners derive from sales deflated by GDP by industry) are detemined by changes in labour costs (salaries and wages), input costs (purchases and operating expenditure), and profits. The results are summarised for New Zealand overall in the following figure:
Notice that most of the change in prices (the black line on the left, or the brown bar on the right) is explained by changes in input costs (the grey and blue bars on the left, or the top two blue bars on the right). Very little of the change in prices is associated with changes in profits. As the report notes:
We found that, over the three years to December 2022, prices rose by 14% (or an average of 4.6% per year) – 71% of that price increase can be attributed to the increase in input costs, 15% to an increase in labour costs and 14% to an increase in gross profits.
And when looking at different industry sectors:
In the sectors with the highest inflation, input costs was the biggest contributor, not wages or profits.
This leads Sense Partners to conclude that:
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.
One of my pet hates is the tendency for media and other commentators to transplant narratives from other countries to New Zealand. Inequality is one example (there is little evidence that it has been increasing in New Zealand in recent years), and greedflation is clearly another. Of course, I am also sceptical about the case for greedflation in other countries as well, as my previous posts on this topic make clear.
Of course, much could be made about the funder of this research (BusinessNZ) having a vested interest in the results not showing greedflation. Also, the omission of the financial sector, which is often held up as an exemplar of greedflation, is notable. The way that Sense Partners determined price changes (deflating sales revenues by GDP by sector) could also be criticised, as it isn't a direct measurement of price changes. It's difficult to say how much bias that introduces into the analysis. Nevertheless, this report demonstrates that the evidence for greedflation in general is very weak at best.
*****
[*] At least, I hope the link works. If not, you can find the data by going to Infoshare, then sequentially choosing: Industry sectors; Business Data Collection; and Industry by financial variable.
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