Greedflation is real
The New Zealand business community is in damage control over people beginning to realise inflation is not a result of a mechanistic interaction of two number driven forces; demand and supply. Inflation is often driven by business people trying to maximise profit.
Business NZ commissioned a report on Greedflation – inflation that is driven by profit seeking. Radio New Zealand reported this in an article of 14 June 2023 ‘Inflated company profit margins are not a major factor in driving up prices in New Zealand – report’. The article heading say’s it all – it is a factor but not a major factor in the reports opinion.
When I go to the commissioned report, the article has a link, it has a few significant intellectual flaws or omissions.
It uses the great data held by Statistic’s NZ and it uses their categories of business.
First it leaves out the ‘Financial sector’ category of business because – ‘Financial firms require more complex analysis, as the volume of services consumed is not conceptually the same, which is outside the scope of this paper.’ (Under heading 1. Profit-driven inflation approach).
But leaving it out does not leave out greedflation. We all know that the banks in New Zealand are making record/windfall profits; this has been regularly reported on. We also know that because of our current tax rules encouraging borrowing through interest deductibility, and the difficulties of raising capital in New Zealand, our businesses do a lot of borrowing. So the greedflation of the banks, maximising their profits, is still held within the borrowing costs of the New Zealand business. The report say’ input costs are not greedflation, and assumes greed can only be measured within the profit margin.
Removing the financial sector does not remove the impact of greedflation on New Zealand business and ultimately that means New Zealand consumers are paying for greedflation because businesses simply pass their costs onto consumers. I concede you could argue that inflation is not a direct fault of the New Zealand business; but it does not remove the fact we are paying for greedflation.
The second major omission is the report ignores the structure/makeup of the New Zealand business environment; it is dominated by franchises, the most obvious are Starbucks/MacDonalds/KFC etc
Many services for these franchises come from overseas, e.g advertising, management support, input sourcing for the products sold, loans etc These are input costs to the franchises. Those costs are one of the main ways profits are taken out of the businesses. But theses costs are wide open to greedflation. In fact an article in The New Statesmen mentioned Starbucks as a business that was making windfall profits, along with a host of others. Because the inputs cost are wide open to greedflation you can’t successfully say, as this report tries to; that the input costs are just costs and therefore not increased by greedflation.
A third factor is the report uses averages of profit margins from 2017 to 2022 to show pre and post covid profit margins. Averages – there are hundreds of business in New Zealand, many are franchises (I just explained how profits are stripped out), that are lean and hard working. These small businesses have relatively low levels of profitability. There numbers will pull down the average for the few central owner companies who could well be undertaking greedflation but the lack of granularity in this report means we simply can’t see the greedflation on this level of data.
Fourthly, Figure 4 in the report takes the ‘rise in prices’ over the period 2019 to 2022, and splits that rise into three categories; Inputs, Labour, Profits; and says how much each category contributed to that rise. For example –
- Transport, Postal and Warehousing had a 25% increase in price over the period. Of that 25% it says:
- Input costs represent 59% of the increase, (rounded)
- Labour represents 17% (rounded)
- Profit represents 23% of the increase. (Rounded)
But of course Labour and Inputs are being pushed up by externals costs. Profit is simply what is left over after costs. So the table is saying firms in this sector, and most other sectors, are undertaking greedflation. Over the period they are increasing their profit margins and passing this onto customers. This sits at odds to Figure 2 where their message is ‘Profit Margins have been lower than usual since covid’.
This report simply does not have the granularity of data to make the assertion it does that greedflation is not in New Zealand. This report should never have got past the journalist or the editor, (let alone the people in Business NZ) . I can see no 4th estate push back.
p.s. it was suggested to me that this report should be printed out and stored by the toilet. Don’t do this, you’ll never get the smell off your hands.
It seems to me that most journalists (with exceptions) follow the prevailing economic orthodoxy “on the back of” the standard tertiary education curriculum and the “spaces” they inhabit.
Most times the rhubarb goes unchallenged.
Hopefully @ Stephen, you’ll have also provided the RNZ bizzniss “team” (Giles, Nona and the cadets) with your analysis without having to face any “headwinds” so that we can all expect a “soft landing” in terms of balance and a reasonable critique of the journalists claims – “in this space, going forward”
The clever use of percentages as fixed standards leads to unsatisfactory outcomes. They should be used as indicators showing proportion and denoting change.
Example :
Fixed GST at 15% on a purchase of $100 = $15.
If the price goes up sharply because of inflation, supply chain delivery problems, growing demand, rising resource costs etc to $150 – GST is then $22.50.
It’s the same article at a higher price but the same GST percentage has taken an extra $7.50 in tax.
This sliding effect from a set percentage is adding inflationary pressure on consumers, and when people are struggling, and impoverished further from high prices, is an unfair tax burden. The wide use of percentages as rigid measures, is pernicious and inappropriate.
The clever use of percentages as fixed standards leads to unsatisfactory outcomes. They should be used as indicators showing proportion and denoting change.
Example :
Fixed GST at 15% on a purchase of $100 = $15.
If the price goes up sharply because of inflation, supply chain delivery problems, growing demand, rising resource costs etc to $150 – GST is then $22.50.
It’s the same article at a higher price but the same GST percentage has taken an extra $7.50 in tax.
This sliding effect from a set percentage is adding inflationary pressure on consumers, and when people are struggling, and impoverished further from high prices, is an unfair tax burden. The wide use of percentages as rigid measures, is pernicious and inappropriate.
What can be done immediately the GST should be dropped back to 10% with 2.5% paid by government to Councils within set geographical zones from whence the GST has come. Feeding money spent back to the locals for basic infrastructure use, not stadiums or flash airports, but to provide basics that support the people and their businesses.
That would be good for now and a purchase tax on new goods replace the ubiquitious GST. so those trying to buy food, repair say, their goods, or their health etc aren’t burdened by greedy Dr Dolittles in government.