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Inflation: Server costs rise, software sells at a premium

Latest PPI data reveals a 3.1% month-over-month uptick for host computers and servers, while storage prices drop slightly and professional services stand pat.

The U.S. government's latest inflation data offers a mixed bag for IT managers: Server costs escalated in July, following a one-month reprieve in the inflationary trend, while storage expenses continued to drop and professional services leveled off.

Host computer and server prices saw a month-over-month increase of 3.1% in July, according to the August release of the Producer Price Index (PPI), which tracks prices paid to the producers of goods and services. The rise followed a 1.2% server cost decrease in June, a decline that interrupted eight consecutive months of price increases.

Computer storage, however, dropped for the second consecutive month. A month-over-month decrease of 0.52% in July followed a 0.42% decrease in June. Prior to that June decline, storage costs had grown steadily since August 2021, according to PPI data.

Meanwhile, professional services and consulting costs in July were flat with the previous month. Costs in that sector had been on the rise in 2022, as service providers boosted rates to compensate for higher labor costs.

Tech buyers can anticipate the current pricing turbulence to continue, with a number of factors in play. "We expect prices will remain changeable for the foreseeable future," said Matthew Ball, chief analyst at Canalys, a market research firm.

Inflationary pressures aside, we have seen a multiyear trend in server prices increasing due to the requirement for richer configurations to support more compute-intensive workloads.
Matthew BallChief analyst, Canalys

He cited foreign exchange fluctuations, COVID-19 restrictions continuing to disrupt supply chains and vendors clearing product backlogs -- often sold at prices set six months ago.

Factors in hardware pricing increases

The rise in hardware prices is linked to ongoing chipset shortages. But component scarcity and related cost increases aren't the only issues.

"Inflationary pressures aside, we have seen a multiyear trend in server prices increasing due to the requirement for richer configurations to support more compute-intensive workloads," Ball said.

While list prices have risen, discounting in competitive sales scenarios can offset the increase, Ball added. He also noted the difficulty in month-to-month storage and server appliance price comparisons, citing the different configurations customers demand.

'Mission-critical' software commanding premium prices

IT managers face a pricing double whammy in that software costs are also rising, but for reasons other than general economic trends. A Forrester Research report published in August noted that the PPI for application software has increased in recent years compared with other tech sectors. The reason? Software's centrality to digital businesses leaves vendors free to boost prices.

"Software solutions are mission-critical in nature and vital to the day-to-day operations of a modern enterprise," Forrester's "Global Software Industry Forecast" stated. "Leading software vendors can raise prices consistently without losing demand, resulting in high and stable margins." Forrester pointed to Adobe's cost hike for its Creative Cloud offering and Microsoft's price increase for its Office lineup earlier this year as examples.

Inflation, higher interest rates and geopolitical turmoil will have "little impact" on enterprise software uptake, however, with the sector projected to expand 12% in 2022, according to Forrester.

raph of current inflation trends in IT
CIOs face price fluctuations across the IT spectrum.

Services flat -- for now

While professional services leveled in July, buyers shouldn't look forward to lower prices. Canalys surveyed about 350 channel partners, mostly in the EMEA and APAC regions, and found that more than 50% of them expect to increase managed services prices in the next six months.

Factors such as automation might reduce professional services costs in some cases, but "people-intensive services will be under pressure from wage inflation," Ball said.

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