We’ve all felt the pain of increasing prices over the past couple of years. The latest retail trade data from Stats NZ gives some insight into how consumers have responded and the consequences for retail businesses. The chart below shows falling real retail sales across many retail sectors during 2022 and the first half of 2023. Real retail sales are a measure of sales volumes. They are calculated by dividing total dollar sales by a composite price index for a group of retailers. The result is still measured in dollars (at a fixed point in time) but can be thought of as reflecting the total volume of goods and services sold. Across 15 retail sectors, 10 have seen falling volumes over the past 18 months and 5 have seen rising volumes, although two of those have only risen slightly.
Looking at the overall volume change between early 2022 and mid-2023 makes this even clearer.
The same dataset also gives the overall price indexes for each retail sector. Prices increased in all but two of the retail sectors over 18 months, and for about half of the sectors the price increase was greater than the overall rate of CPI inflation for the period. Prices at supermarkets and other food retailers increased by almost double the rate of overall inflation.
It’s interesting to relate these volume changes to price changes. Normally we expect higher prices to reduce volumes, but consumer behaviour is more complicated than that as people substitute across different types of consumption in response to relative price changes. The scatter plot below shows the percentage change in sales volumes between early 2022 and mid-2023 against the percentage changes in prices for the 15 retail sectors above. A few interesting cases are highlighted:
- Accommodation saw the largest volume increase despite also having the largest price increase. This might reflect the ongoing post-pandemic tourism recovery. Food and beverage services sales volumes might also be benefitting from tourism.
- Department stores also had a large volume increase. This category includes discount stores like The Warehouse and Kmart, and prices in this sector increased relatively little compared to other retail sectors.
- Supermarket and grocery stores, specialised food retailers, and liquor stores had some of the largest price increases. Of these, supermarket and grocery stores saw the smallest reduction in volumes, possibly reflecting people substituting away from the more discretionary type items sold by specialised food and liquor retailers. Still, people are buying less grocery food overall, in response to higher prices.
- Despite price reductions, electrical goods retailers saw the largest volume reduction. This probably reflects people substituting away from durable goods to more essential things like food, plus a hangover of very high sales of electronic goods during pandemic lockdowns in 2020 and 2021. Similar trends seem to be affecting hardware stores and garden centres, although prices have increased as well.
- Fuel sales volumes increased only slightly despite a price reduction of more than 5%. In general the demand for fuel is quite insensitive to price changes in the short term.