Aggregate numbers can hide a lot of detail. Prices for individual products such as food items and fuel have continued to climb. However, even for these goods, inflation has been lower in recent years. In fact, inflation across all retail categories has pulled back by around two percent since 2010, with the prices for goods such as clothing and recreational equipment actually falling.
Part of the reason for the softness in retail prices is that costs have been rising at a more gradual pace than in earlier years. Since 2010, the landed prices of many imported goods have been dampened by lingering softness in global demand and strength in the New Zealand dollar. Domestic costs, such as transport and wages, have also been more muted than prior to 2010.
However, changes in costs aren’t the whole story. In fact, as the figure below shows, while retail prices have been flat in recent years, input prices and wages in the retail sector have actually continued to climb, albeit at slower rates than in earlier years.
A more significant factor that has weighed on prices is the extent of price competition in the New Zealand retail sector. Over the past few years, retail price competition has been fierce, resulting in downward pressure on margins – a situation that mirrors conditions in many other economies.
This increase in price competition is a result of the tough trading conditions that many retailers have faced in recent years. This includes lingering strength in the NZD, which has meant that competition from imports has been particularly strong.
In addition, recent years have seen structural changes in the retail landscape that have affected businesses’ pricing decisions. This includes the increased prevalence of online trading, and the increased prevalence of large-scale retailers, particularly in fields such as home appliances and hardware.
Over the coming year, we do expect to see some pick up in retail price inflation. The NZD has fallen by more than 10 percent since mid-2015, and the price of imports has been climbing. This will gradually flow through to higher prices on shop floors.
Nevertheless, we anticipate that the extent of price increases in the retail sector over the next few years will remain modest and that pressure on margins will persist. Domestic demand is expected to remain modest over the coming year as the economy confronts headwinds from lower dairy prices, a softening in the housing market, and the levelling off in reconstruction activity in Canterbury. At the same time, lingering weakness in the global economy will continue to weigh on the prices of many international traded goods. Finally, the structural changes that have been affecting the retail industry – especially the increased prevalence of online trading – mean that the increase in price competition in recent years is likely to be enduring.
This story originally appeared in NZRetail magazine issue 742 February / March 2016