Contract inflation clauses add pressure
Millions of extra dollars leak out of councils’ budgets
Inflation clauses built into contracts are costing Tauranga and Western Bay of Plenty councils millions of dollars. Figures supplied under the Local Government Official Information and Meetings Act showed inflation adjustments have cost the Tauranga City Council $8.3 million and the Western Bay of Plenty District Council $3.6m.
The figures were released ahead of a Reserve Bank decision on Wednesday to raise the Official Cash Rate (OCR) by 25 basis points to 5.5 per cent. It surprised markets by calling the peak in the OCR at 5.5 per cent, when many had expected more hikes to come.
The Reserve Bank said inflation was easing from its peak, with consumer spending growth tapering off, residential construction declining and house prices being reined in.
“More generally, businesses are reporting slower demand for their goods and services and weak investment intentions. Businesses report that a lack of demand, rather than labour shortages, is now the main constraint on activity,” it said in a release.
The most recent Consumer Price Index figures put annual inflation at 6.7 per cent for the 12 months to March, down from 7.2 per cent in September and December, and the 30-year record 7.3 per cent annual increase in June.
Inflation has been hitting council finances as well as consumers’ pockets. In response to an official information request, the Tauranga City Council told the Bay of Plenty Times it had 630 contractors with agreements to provide services such as felling trees or carrying out roadworks.
Democracy services team leader Kath Norris said it identified 48 contracts with inflation clauses, most of which had an inflation adjustment of about 5 per cent, with about a fifth using some other measure, such as the CPI change.
Management accounting and business advice manager Sherry Tecofsky said they had a combined
In a high-cost environment, no one wins. Infometrics principal economist Brad Olsen
initial value of $253.8m.
Inflation added $5.9m by the end of the 2021/22 year, and $2.4m in 2022/23, totalling $8.3m.
The Western Bay of Plenty District Council has 245 active contracts. Inflation was expected to add about $3.6m to significant contracts this financial year.
General manager of corporate services Adele Henderson said the council took an approach “where pricing is fair for the industry, regardless of whether indexation is included in the contract”.
While not all claims or invoices specified itemised charges, the “council has experienced increases in costs that are in line with indices published by independent experts”.
Money spent on “significant” contracts, which made up about 80 per cent of service providers, came to $38.3m for the 2021/22 year. An estimated $41.9m was expected to be spent in the 2022/23 year.
Infometrics principal economist Brad Olsen said factors out of most people’s control, such as supply chain issues post Covid-19 and the Russian invasion of Ukraine, were putting pressure on all aspects of society in
one way or another.
“People are having to ration supply and people are putting their prices up,” he said.
Olsen said Infometrics estimated inflation meant the average household was spending $1000 more a year on the same grocery shop compared to a year ago.
“In a high-cost environment, no one wins.”
However, Olsen said he was “certainly seeing more” businesses dealing with inflation clauses in agreements. “It’s the sort of thing which you wouldn’t necessarily expect, [but] you do see a lot more businesses including those clauses,” he said.
Stats NZ consumer prices senior manager Nicola Growden said in a March statement food was the largest contributor to the most recent annual inflation rate due to rising prices for vegetables, ready-to-eat food and milk, cheese and eggs. The nextlargest contributor was housing and household utilities, due to rising prices for construction and rents.