Profits made up 55 percent of the pressure that was driving up costs in New Zealand between mid 2021 and the end of 2022, when the costs of goods and services were looked at using a 'GDP deflator' economic calculation. Photo: 123RF
Businesses have been returning record profits while inflation surges during the cost of living crisis, new research shows.
The study was designed to emulate analysis done overseas by the European Central Bank and a number of other research institutes, and was carried out by FIRST Union, the Council of Trade Unions and the lobby group Action Station.
It came after a report from Business NZ earlier in the year that said inflated profits were not the driving force behind rising costs in New Zealand.
How the study compared cost increases with profits
FIRST Union researcher and policy analyst Edward Miller said the research used a measurement for inflation known as the GDP deflator, which was arrived at by calculating the price change of all goods and services produced in both the public and private sectors (not including input costs).
Miller said the GDP deflator was useful as it was a broader measure of inflation than the consumer price index (CPI) which was based on a basket of consumer goods and services purchased by households (but did not include interest rates).
What the study found
The study looked at food, housing and transport, which Miller said made up about three quarters of pressure on the consumer price index.
"Essentially what we found is that in the pre-pandemic period - mid-2016 up to the end of 2019 - we found that the profit contribution was very dominant: 64 percent of pressure on the GDP deflator comes from profits and less than 20 percent comes from labour."
Once the Covid-19 pandemic begun, from the beginning of 2020 to mid 2021, the research showed the labour contribution was dominant, but that there was very little inflation.
But during the main period of rising costs, from mid 2021 to the end of 2022, Miller said the profit contribution accounted for 55 percent of pressure on the GDP deflator, while wages were less than a third at 28 percent.
A report commissioned by Business NZ in May, called Greedflation in New Zealand, found while increasing costs showed the price of goods and services had increased across the board, in New Zealand inflated profits were not the driving force of those cost increases.
Business NZ director of advocacy Catherine Beard said the report found profits were leaner than they were pre-Covid.
"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 percent."
Beard said the remainder was made up of equal parts wages and profit and that input prices were a much larger driver of output prices than profits.
Miller said they had been careful not to use the term greedflation, which was an unhelpful way to frame the issue.
"I don't think that makes any sense in the way businesses operate, [they] have a fiduciary obligation to shareholders to maximise income ... but when you have rising input costs, you can maintain your margins."
He said monetary policy needed fiscal friends to appropriately distribute the rising costs that come from inflation and the rising benefits to certain parties.
Measures could include windfall taxes, levies on bank profits and fiscal engagement to distribute the costs and benefits of inflation more equitably.
