NZIER's Christina Leung explains how higher interest rates are impacting New Zealand businesses and why profits aren't driving inflation
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 But as the Reserve Bank has withdrawn that support, it has become much more difficult to pass on costs.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.”