February 21, 2022

Business prices continue to rise

But the rate of increase is showing signs of slowing

Businesses price inflation is broad-based as nearly everything, from labour to dairy and construction materials, continues to become dearer. However, the latest data shows evidence of inflationary pressures easing, offering some respite to businesses.

Some of this inflationary pressure is imported, while some is a result of conditions in the domestic economy. For example, major skills and labour shortages have ensued from border restrictions. Labour costs have increased strongly over the year for businesses in the construction (3.3 percent), accommodation and food services (five percent), and healthcare (3.5 percent) industries. Since New Zealand is small country and a price taker in the world market, global disruptions can have a significant impact on the prices producers pay for their inputs. Shipping delays at major ports and spikes in prices for various commodities such as oil and steel have added to producers’ woes. Collectively, these challenges have translated into a considerable increase in cost pressures on businesses.

Producers’ input and output prices have been accelerating sharply since early last year.

In the December 2021 year, businesses’ input prices increased by 8.1 percent. The dairy, construction, and manufacturing industries experienced some of the biggest increases. Input prices for dairy product manufacturers were up 23.2 percent year-on-year. Unusually wet and cold weather, and now an uncharacteristically hot summer has plagued dairy producers. Moreover, strong growth in feed prices have discouraged farmers from increasing supply to match heightened global demand. 

Heavy and civil engineering construction costs were nine percent higher than the year before. Demand for residential building construction, as measured by building consents issued, is at record highs. The construction sector is battling severe skills and materials shortages, particularly timber products. It’s no surprise then that the Cordell Construction Costs Index saw an annual growth of 6.1 percent. 

These elevated input costs have spilled over into higher output prices. Prices received by producers for their products and services were up by 7.2 percent. Dairy cattle farmers received, on average, 27 percent more for their outputs, compared to the year before. Manufactured outputs also experienced double digit growth in prices (12.8 percent).

The latest data shows that inflationary pressure has been slowly easing.

Although business prices are historically high on an annualised basis, there has been a slowdown in the quarterly growth in prices. Input and output inflation for businesses peaked in the June 2021 quarter at three percent and 2.6 percent, respectively. By the December 2021 quarter, input and output inflation had fallen to 1.1 and 1.6 percent. The deceleration in overall costs can be attributed to falling prices for producers in the electricity and gas supply industry. Prices paid by businesses in this industry fell by over 20 percent during this period, and prices received by them fell by 17.6 percent. While prices are still rising for businesses in the construction, manufacturing, and primary sectors, the pace of these increases is trending downwards.

Consumer prices also likely to ease.

Consumers price inflation (CPI) is now well beyond the Reserve Bank’s target band of one to three percent, with the latest reading at 5.9 percent for the year to December 2021. As inflationary pressures cool down for businesses, we can expect the CPI to gradually subside in the latter half of 2022 as supply chain snags are alleviated and borders open up.