Rising profits, not wages, primary driver of domestic inflation during cost of living crisis - report

A new report claims rising profits - not wages - were the primary driver of domestic inflation during the cost of living crisis. 

Inflation shot up post-COVID-19 to a peak of 7.3 percent in June last year. Since then it has dropped to 6 percent but is still well above the Reserve Bank's target range of between 1 and 3 percent. 

This has pushed the costs of necessities sky high with household costs rising by 16.3 percent since 2021, food increasing by 9.6 percent in the last year and repeated hikes to the official cash rate. 

Inflation has been blamed on the war in Ukraine, rising labour costs, supply chain constraints and pandemic spending. 

But a report released on Monday by FIRST Union, NZ Council of Trade Unions and Action Station argues corporate greed is the true culprit. 

FIRST Union researcher and policy analyst Edward Miller said the report found from mid-2021 to the end of 2022, rising profits contributed to more than half of domestic inflationary pressure compared to less than a third which was linked to labour costs.

Miller said this won't be news to Kiwis who are struggling to afford basics while watching companies post record profits. 

"Many communities that are enduring rising prices while businesses post record profits have reached the same conclusion. They know that they are also on the receiving end of an inflation policy response that disproportionately impacts the poor and vulnerable," he said. 

The report used the same methodology as reports by the OECD, European Central Bank and the Australia Institute to decompose the profit and labour contributions to domestic inflationary pressure. Sector- and firm-level data provide further insight into how rising profits have fed into prices, looking at food, transport and housing.

Director of ActionStation Kassie Hartendorp accuses businesses of using the cost of living crisis as an excuse to increase prices. 

"Over the past year, inflation has been the grand excuse for anyone to wield at their disposal. It provides cover for business owners to push up prices while withholding wage rises," Hartendorp said. 

"It has been sharpened as a weapon for political gain by parties wanting to shrink government and the public sector. All of this has distracted us from the big businesses driving inflation."

She went further accusing big businesses of "shamelessly profiting off customers' misery". 

"This report shows that our largest corporations have been driving inflation at a time when people are struggling the most. We need policies that will address the root of the problem and ease the pressure for all of us."

It's a view shared by CTU policy director Craig Renney who said the report is a wake-up call that better policies are needed to reduce inflation. 

"We need to tackle inflation in both the short and the long-run, and to make sure that the costs of our inflation response are falling on those who have benefitted the most over the past few years. 

"In the long-term, inflation reduction requires investment in those things that will make a consistent difference. We need to tackle rents, energy and transport costs, and to make sure that Kiwis have access to high-quality public services. Doing this will not only reduce inflation, it will create the more productive and sustainable future".

The report found from mid-2021 to the end of 2022 - when inflation was surging - rising profits contributed more than half of domestic inflationary pressure, while wages were responsible for less than a third.

The same trend was also apparent during the pre-pandemic period, with the profit contribution dominating inflationary pressure. 

The Reserve Bank currently manages inflation through changes to the official cash rate (OCR) - effectively how much it costs to borrow money. 

In response to high inflation, the RBNZ hiked the OCR from just 0.25 percent in August 2021 to 5.5 percent now. 

The report suggests changing the way the country deals with inflation by breaking the approach down into short-term and long-term inflation. 

"The first part - short-term inflation - would continue to be managed by the Reserve Bank, together with support from the government when extreme challenges occur," the report suggested. 

It pointed to Spain as an example of this approach working "to reduce inflation remarkably quickly". 

"The country's government capped energy prices, lowered the cost of public transport, taxed excess profits and put in place limits on how much landlords can raise rents. For example, in 2022, the government has prevented landlords from increasing their rental prices by more than 2 percent, a measure now extended until 2024," the report said. 

"It also cut value-added tax on staple food items to zero. This has seen inflation fall from 7.3 percent in October 2022 to 2.1 percent in July 2023. 

"There, profits have been shown to be responsible for 90.7 percent of domestic inflation by the Spanish Economic and Social Council."

The report said the government should explore which "options would be appropriate in Aotearoa New Zealand given our specific economic context". 

It suggested price controls could be implemented for industries with a lack of competition. And windfall taxes could be introduced and used to fund income support or greater supply of goods and services at particular times. 

"This would have distributional benefits that are far preferable to the blunt instruments of the Reserve Bank," the report said. 

The report suggested the Government should legislate that it is responsible for targeting and stabilising core inflation over the next 10 years. 

"The Reserve Bank will be asked to assess whether this is being delivered as part of its 6-monthly Financial Stability Report statements. The Reserve Bank will be required to publish a letter setting out how the Government is delivering on, or failing to deliver on, this target. This will include an assessment of what the consequences of that failure are likely to be," the report said. 

It suggested the legislation should include targets to ensure the median rent in Aotearoa is no more than 30 percent of the median household income. 

It also suggested requiring the Government to publish how many households live in energy poverty, what actions are being taken to reduce rents and energy poverty and what impact they are having. 

"The Government will need to demonstrate from a distributional perspective how it is delivering equity in its responses to long-term inflation. The Government will be required to show through Budget documentation that its policies in this area contribute to its overall economic strategy and to child poverty targets," the report suggested.