11 Jul 2022

Is the inflation in NZ because of profits?

From Afternoons with Jesse Mulligan, 1:15 pm on 11 July 2022

Inflation has reached 8.3 percent in the US and 7.4 percent in Europe – and some analysts have said that rising profits are to blame.

Others says businesses are simply keeping up with rising costs themselves.

Researcher and policy analyst at First Union, Edward Miller has been looking into the data here, and says profits are at record highs.

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Photo: PHOTO NZ

“There's strong signals coming from some of the big institutions that control central banking, for example, the Bank for International Settlements, which is like a policy coordination body for central banks, they say that the power of labour has declined over time, but the power of firms over pricing has increased to historical highs.”

There is less available data here, he told Jesse Mulligan.

“I picked through Treasury's corporate tax data to try and get a picture of where our corporate tax take was, and extrapolate that out to try and work out whether inflation was being driven by corporate profits.

“I was quite interested to find that in the most recent year, the year to March 2022, corporate profits in this country had spiked by a pretty staggering 39 percent.”

In raw dollars that is another $20 billion, he says.

“And at the same time, wages as in the total wage bill of the country had only increased by about $11 or $12 billion.

“So, it looked like firms were doing a lot better than workers even though workers seem to be on the receiving end of the kind of policy responses that we get to rising inflation.”

Profit increases such as this are not typical in New Zealand, he says.

“Profits jumped up to $72b in that most recent year. They hadn't been at that level prior. And it's the biggest increase that we've ever seen, both in terms of the raw dollars, whether that's inflation adjusted dollars or non-inflation adjusted dollars, and it's also the biggest percentage increase that we've seen, ever.”

Meanwhile, workers are being squeezed, he says.

“We've started to see in some jurisdictions, the UK for example, have now implemented a windfall profit tax on energy companies.

“We know here in New Zealand that in the most recent year energy companies’ profits jumped by around about 60 percent, which is a pretty big number.”

A windfall tax could help divert profits back to workers here, he says.

“In the UK, they've only applied it to the energy companies, due to the data that they had that suggested that energy companies were gaining the highest profits, they have said that there's a 25 percent levy on energy profits over the next 12 months.

“And that should generate around about 5 billion pounds, which is roughly $10 billion New Zealand, I think we'd have to have a bit of a closer look into data, which is not publicly available, probably the Reserve Bank and Treasury and those kinds of people would have to look into their data and see which sectors are driving profitability, is it confined just to the energy companies?”

He thinks more than one sector in New Zealand has been banking higher than normal profits.

“I think there's probably a case to be made that the banking sector has also had a pretty good run through the pandemic, the supermarkets have had a pretty good run, and maybe the construction sector as well. But we need to get a bit more data in terms of how we would structure a windfall profit tax.

“All the sectors that I was looking at, banking, and supermarkets and the energy sector, we have pretty low competition, there's not a lot of players on the market.”

A historical trend to non-union labour in the last few decades has exacerbated the situation, he says.

“Union density has fallen from well over 50 percent at the end of the 1980s down to about 19 percent now.”

Similar data can be seen internationally, he says.

“The Bank for International Settlements says that its firms pricing power, as measured by the mark-up of prices over time, that's increased to historical highs.

“The co-relative impact of that is that workers become absolute price takers, both in terms of the cost of labour and the cost of goods.”

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