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Technology inflation rate edges up for storage, IT services

Price hikes persist for professional services and cloud, while an increase in storage costs could reflect a return toward more typical pricing levels after a period of decline.

The technology inflation rate across a broad band of IT offerings -- including storage, professional services and cloud -- increased in November, according to the U.S. government's wholesale inflation index.

The Producer Price Index (PPI), released yesterday, reported a month-over-month 1.3% increase in storage device prices, countering a pattern of declining prices over the past several quarters. Professional services saw a 1.5% month-over-month price hike, following a decline in October. And the data processing, hosting and related services category, which includes cloud, edged up 0.4% on a monthly basis.

In comparison, November's PPI for all products and services was flat with October's reading and up 0.9% year over year.

NAND, DRAM on the rebound

The uptick in storage device pricing, meanwhile, could reflect a shift from steep vendor price cutting toward levels approaching normal pricing.

Jim Handy, a semiconductor and solid-state drive (SSD) analyst at Objective Analysis, said NAND flash prices are definitely up, noting that flash accounts for a large share of the hardware cost of storage systems.

NAND "was selling below manufacturing cost for a while, which is unsustainable," he said.

The market for storage systems and SSDs in hyperscale data centers nearly vanished in late 2022 and early 2023, Handy noted. In a bid to spur sales, manufacturers probably cut prices below what they wanted to charge, he added. The decline followed the return-to-work shift that reduced the demand for internet bandwidth, which in turn scaled back the need for supporting infrastructure such as hardware.

"Now that purchasing has opened back up a bit, the suppliers are likely to raise their prices back to something reasonable," Handy said.

Graphic tracking IT commodity pricing.
Storage, professional services and cloud saw month-over-month price increases in November.

Indeed, contract prices for dynamic RAM (DRAM) and NAND flash are projected to rise in the fourth quarter, according to market research firm TrendForce. DRAM prices began declining from Q4 2021 and started to rebound in Q4 2023, a TrendForce spokeswoman said. PC DRAM DDR4 8 GB, a mainstream product in this category, saw its contract price increase 9.6% in Q4, ending an eight-quarter slide, she noted.

NAND started declining from Q3 2022. Recovery began in Q3 2023 with a quarter-over-quarter increase of 2.3%. It will take some time for a complete turnaround, however. Some products experienced a 60%-plus price drop over the past few quarters, according to TrendForce.

Services pricing: A blip or a trend?

IT services prices increased in 2022 amid talent shortages, higher employee compensation and high utilization rates. Much of 2023, however, featured more stable pricing. Whether the November PPI increase in the professional services and consulting category is a short-term blip or a trend toward higher rates will be borne out in the coming months.

John-David Lovelock, research vice president at Gartner, said the current market conditions don't suggest a sustained uptick in IT services pricing.

"The fundamentals aren't there to support any kind of across-the-board price increase," Lovelock said.

For one, employee attrition rates for most service providers have returned to long-term normal ranges, he said, compared with the 25% attrition at the height of the great resignation. Lower attrition spells less pressure on compensation.

Demand for consulting services, however, remains on a steady track. CIOs still face problems with staffing, which boosts staff augmentation activity in areas such as managed services, Lovelock said. Gartner forecasts a 10.4% consulting growth rate in 2024 and a compound annual growth rate of 11.7% for the 2022-2027 period.

Inflation persists as C-suite concern

While consumer and wholesale inflation, overall, has shown signs of easing, concerns over price increases appear to be much on the minds of top executives.

A survey of more than 1,100 board members and C-suite executives identified "economic conditions, including inflationary pressures" as the No. 1 risk for 2024, according to a report from consulting firm Protiviti and North Carolina State University's Poole College of Management and its Enterprise Risk Management initiative.

The report, published earlier this month, said macroeconomic concerns outranked the "ability to attract, develop and retain top talent" as the most pressing issue.

The wider use of generative AI among IT services firms might actually lower price points on projects. While the technology won't necessarily influence hourly rates, the productivity gains among less experienced consultants will help projects finish more quickly and less expensively, Lovelock said.

In cloud services, meanwhile, the 0.4% price increase continues a climb that began in Q4 2022, according to PPI data. A range of factors including higher energy costs and SaaS vendor price hikes have contributed to inflation in the data processing services sector.

John Moore is a writer for TechTarget Editorial covering the CIO role, economic trends and the IT services industry.

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