sign up log in
Want to go ad-free? Find out how, here.

Chief economist Paul Conway says RBNZ doesn't see evidence of an increase in profits feeding into inflation at a widespread level

Business / news
Chief economist Paul Conway says RBNZ doesn't see evidence of an increase in profits feeding into inflation at a widespread level
24th May 23, 4:45pm by Gareth Vaughan
profits

The Reserve Bank has "had a good poke at the data" to check on the risks of a profit-price spiral, but doesn't see any evidence of one at a macro level, chief economist Paul Conway says.

The Reserve Bank hierarchy was asked about the role profit margin expansion could be playing in inflation at a press conference following the release of Wednesday's Monetary Policy Statement.

Reserve Bank governor Adrian Orr said the data "remains as poor as ever," adding that "it's about all even" between wages and profits and the underlying pressure on inflation.

Over the past year or so the debate over whether corporate profit margin-led inflation has contributed to high inflation has moved from a fringe view to the mainstream in Europe, the US and Australia but has been slower to emerge in New Zealand. Conway has previously said; "we don't have great data on profits. I think it's a real blind spot on how we measure our economy."

However, he went further on Wednesday.

"We have had a good poke at the data just to be up on the risks of a profit-price spiral. At the aggregate level we don't see any evidence of an increase in profits feeding into inflation. It doesn't rule out the possibility that there are markets in New Zealand that do suffer from a lack of competition and where profits may be above normal levels. But we haven't seen that increase at the aggregate level. And to the extent that there are markets suffering from a lack of competition, it's the Commerce Commission that are into that sort of space," said Conway.

"I think of it as exactly symmetric, wage-price spiral, profit-price spiral. We need to keep an eye on both. And actually across both of those we're not seeing much evidence of those kind of second round effects at the moment, which is one of the reasons why we've got a bit of confidence that we're getting on top of inflation and we'll see significant declines in inflation going forward."

Overseas Isabella Weber, a German economist at the University of Massachusetts, has been at the forefront of raising the profile of the concept of profit margin-led inflation. UK-based UBS chief economist Paul Donovan has also weighed in.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

25 Comments

by  Idoubtit  |  24th May 23, 4:57pm 1684904243

Bollocks.  Grocery bills are, in my view, considerably the result of profit margin expansion by supermarkets.  Poke a little harder RBNZ as that response sounds like you were caught off guard for having done nothing.

[Adrian Orr said the data "remains as poor as ever," adding that "it's about all even"]  How can one draw the conclusion that it is about all even if the data is so poor?

Up
7
by  iami  |  24th May 23, 5:19pm 1684905558

Are you surprised? 

Up
0
by  Pa1nter  |  24th May 23, 5:28pm 1684906120

The cost to make everything is now significantly higher. Margins in many areas are very hard to come by.

If you were involved in having to grow, produce or assemble anything in your day to day you shouldn't have to look very far at all to see that.

Up
3
by  Officebound  |  24th May 23, 5:57pm 1684907832

Any evidence? Or just reckons?

Up
1
by  Nzdan  |  24th May 23, 11:08pm 1684926482

Forty-six different small to medium-sized suppliers who sell food to both Foodstuffs and Countdown told Newshub the supermarkets are making up to a 55 percent gross profit margin on a product. 

Some more "reckons", not concrete facts though.  

https://www.newshub.co.nz/home/new-zealand/2023/04/group-of-supermarket…

 

Up
2
by  Pa1nter  |  25th May 23, 7:07am 1684955246

"Up to" 55% "gross profit" as reported by small to medium suppliers.

They'll be doing more like 10-20 on the high volume stuff, tops. 

Up
0
by  Nzdan  |  25th May 23, 9:07am 1684962434

We can only surmise.  

Up
0
by  Frank Sobotka  |  24th May 23, 9:29pm 1684920577

Agreed. Supermarket margins are around 50% on products. Insane.

And we also charge gst on food unlike our peers. But we are so intellectually lazy to remove this we write it off as too hard to do or won’t work here.

Up
3
by  Sibrit  |  25th May 23, 3:09pm 1684984143

Removing GST from food would be the most direct method for reducing the cost of living, as food inflation is higher than CPI, and would help the majority of Kiwis, especially those with families.

Even if NZ can't handle zero-rated products, they can certainly handle additional taxes on items, such as tobacco and fuel, so surely they could add a discount onto food, equivalent to 15% GST.

I did read that there is a belief that removing GST from food only really benefits the supermarkets. Is that because the Government doesn't trust the supermarket duopoly to do the right thing?

Up
0
by  morphyoss  |  25th May 23, 4:02pm 1684987342

Well there are a few issues with this,

1. its a tool that can only be used once. What happens in the next cost of living crisis?

2. There is also no guarantee that retailers would pass it on, but they sure will pass on the cost of getting their systems and processes updated to allow them to calculate the tax free items vs tax items. This would also impact not just the big supermarket chains, but any store that sells food items.

3. This may also sound silly  - but define 'Food'. What is tax exempt vs not? Would takeaway food be included? What about soft drinks? Ingredients for food such as flour etc? And then if you can sufficiently define food... why would other important items not be included, over the counter meds, contraceptions, cleaning products etc. These are still things that households use / need.

Personally the better approach would be to break up the duopoly, bring down the barriers to entry and allow much needed competition. This would have a much longer lasting impact to reduce the costs for families than a one off temporary sugar hit.

 

Up
0
by  Sibrit  |  25th May 23, 5:10pm 1684991451

None of those issues are showstoppers. The whole define "food" is a misdirection. Plenty of other countries have managed it, so why can't we?

Is it because of that duopoly? That if we dropped GST tomorrow, by this time next year, the prices for the tax exempt food would be as they are today - increased 15% by the supermarkets over those 12 months in much the same way that new and secondhand low emission cars from abroad very quickly increased in price by the value of the Clean Car Discount?

I agree the duopoly needs to be dealt with, but I don't accept that as an excuse not to remove GST from food - whatever that food ends up being - as its better than doing nothing but wring our hands at how hard it all is to make any of these changes.

Up
0
by  Kate  |  24th May 23, 5:34pm 1684906495

which is one of the reasons why we've got a bit of confidence that we're getting on top of inflation and we'll see significant declines in inflation going forward."

Hmm.  Given roughly a third of the households in NZ rent and given rents are rising while house prices are falling and given those renting are spending in excess of 30% of their disposable income on rent and given they've just increased the OCR once again - I just can't see where/how they determine they are getting on top of inflation.

https://www.interest.co.nz/charts/real-estate/rents-average-auckland

 

Up
4
by  kiwikidsnz  |  24th May 23, 5:47pm 1684907223

Well, they did say current monetary conditions will continue "for the foreseeable future".

Up
0
by  Officebound  |  24th May 23, 5:59pm 1684907977

Rents are deflating in real terms, they are currently dragging inflation down, why can't you see this?

Up
0
by  kiwikidsnz  |  24th May 23, 5:51pm 1684907509
Up
1
by  King of the whiners  |  24th May 23, 6:06pm 1684908393

UK has just followed Canada in having stronger inflation figures than their predicted.

Core inflation just went UP to a recent high from 6.2% to 6.8%.

Headline inflation was meant to fall to 8.2% (from over 10%) but was a sticky 8.7%.

A pattern is emerging of stronger/more persistent inflation - not sure why we will be different.......

Up
4
by  Frank Sobotka  |  24th May 23, 9:31pm 1684920683

Because we are special, nothing that works overseas ever works here don’t forget. 

Up
0
by  kiwi_overseas  |  24th May 23, 6:41pm 1684910483

BS.

Air NZ is milking the public being a near private monopoly with no price regulation.

As someone else notes the supermarkets continue to make oligopoly profits.

The banks are already raising mortgage rates with  4 main banks controlling 85% of the market

The non tradeable sector is also responsible for about half the inflation rate and the government is unwilling to regulate.  Local council rate increases have typically been 10%.

It’s completely out of hand.

 

Up
6
by  Pa1nter  |  24th May 23, 8:32pm 1684917174

As someone else notes the supermarkets continue to make oligopoly profits.

I think their profits worked out that every New Zealander has to pay them $1 per day to store food for them. Doesn't seem too outlandish. Way less than a lease instalment on a massive refrigerator anyway.

All the produce theyre buying is more expensive tho. I partly blame how much anti-fruitpicker sentiment is out there.

Up
0
by  Frank Sobotka  |  24th May 23, 9:33pm 1684920821

The profit margins on supermarkets here are vastly higher than those overseas. And we are a net exporter of food that produces around 8x that which is needed domestically.

We should have some of the cheapest in the world. But a lack of competition over the past 20 years since Woolworths was take over (approved by Comcom) has left us in this predicament and they won’t take the hard action needed to correct it

Up
3
by  Pa1nter  |  24th May 23, 10:10pm 1684923025

You say vastly higher, but the difference is like, 4% net profit, vs 3%. Both of those net margins are a good disincentive for new players because you're looking at a 30 year return on investment.

We're a net exporter but it's an open market. We only have 5 million consumers and few neighbours.

It's got little to do with competition in our supermarket industry, you'd really want the government mandating X amount of produce for the people or some other food subsidies.

Up
0
by  Idoubtit  |  25th May 23, 9:00am 1684962053

You are very defensive of supermarkets Pa1nter.  Do you have a financial interest in supermarkets?

Up
0
by  Von Metternich  |  25th May 23, 10:37am 1684967831

He spends all his time defending the worst excesses of capitalism here.

Up
0
by  Pa1nter  |  25th May 23, 7:42pm 1685000544

I don't have any vested interest, or affiliation with a supermarket.

It's more an issue with the desire to find the bogeyman instead of the actual cause. Supermarkets are just food retailers, and we have a duopoly because margins are so low in food retailing there usually isn't a lot of opportunity for more than a handful of players. This same thing occurs most places, in the states there's only 2-3 main mass market supermarket chains in most markets, with a handful of niche players off to the side.

The main cause of higher food prices is that it's simply costing more to create and supply food.

Up
0
by  Sibrit  |  25th May 23, 3:59pm 1684987188

All I know is that if I want a pay rise this year, I have to go to the boss, hat in hand, with a long list of my achievements and contributions to improving company revenue for the year, and hope he'll give me anything close to inflation.

But since all I've done this year is run myself ragged just to stay in place, as middle management continuously push work they don't have time for onto my lap, I suspect I'll get nothing at all.

Up
0