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IT services inflation follows broader market trend

CIOs can expect to pay more for consulting and professional services as pricing in the sector continues an upward trend that first surfaced last year.

Professional services and consulting prices rose in August, with the U.S. government's pricing data showing increases of 2% month over month and 3.7% year over year.

The uptick is part of a broader trend affecting many types of services. Indeed, services inflation emerged as a key trend in two economic reports released this week. The Consumer Price Index increased 0.1% in August and 8.3% year over year. While gasoline prices dropped 10.6% month over month, a range of services -- from restaurant meals to medical services -- increased.

The trend, propelled in part by labor costs, also surfaced in the Producer Price Index (PPI), which tracks prices paid to the producers of goods and services. While the cost of goods dropped 1.2% in August, services crept up 0.4% -- the fourth consecutive monthly increase, according to the U.S. Bureau of Labor Statistics.

Prices for professional services and consulting, according to PPI data, have been steadily rising since January 2021. Those costs have risen more sharply this year. In April, Gartner reported a price hike among technology services providers, reflecting high demand for services, higher attrition rates and more competitive salaries.

Chart showing services inflation trends for August 2022
Services stood out in August as a source of inflation, while hardware leveled off or declined.

Server costs decline, but remain high compared with 2021

While IT buyers spend more on services, they seem to be catching a break on hardware. Host computer and server costs dropped 1.1% month over month in August, while storage costs were flat, according to PPI data.

While hardware expenses have stabilized somewhat, 2022 server costs still remained elevated compared with 2021 levels. The host computer and server segment saw costs grow 14.4% year over year in August. The increase helped boost reseller partners. The NPD Group, a Port Washington, N.Y., market research firm, reported this week that the technology reseller channel experienced a 16% year-over-year increase in revenue for the first half of 2022. Mike Crosby, executive director and industry analyst at NPD, cited higher average hardware sales prices as the primary driver behind the increase in reseller revenue.

CIOs often act opportunistically in an emergency, canceling whatever spend they can.
Gartner, 'How to Contain Spending in Response to Annual IT Budget Targets'

Managing the risks of cost cutting: Gartner

Amid the turbulent pricing environment, Gartner this week published recommendations for CIOs dealing with mandatory spending reductions or IT budgets that can't keep up with the rate of inflation. The market researcher cautioned CIOs against knee-jerk cost cutting.

"CIOs often act opportunistically in an emergency, canceling whatever spend they can," Gartner noted. "This can damage business performance, making a difficult financial situation even worse."

Gartner advised prioritizing lower-risk activities for spending reductions, since those areas are the "least likely to impair income."

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