Technology costs rise as inflation hits hardware, services

Inflation is affecting IT budgets, bringing cost increases in areas including servers, storage and professional services. The environment appears to be accelerating the enterprise shift by CIOs to cloud, predicted to rise more than 20% in 2022. 

Producer Price Index (PPI) data, which tracks prices paid to the producers of goods and services, reveals a steep year-over-year price hike for host computers and servers -- a 21% surge over pricing levels in June 2021. The Department of Labor's PPI update, released July 14, also shows a 4.7% price increase for computer storage devices and a 2% increase for professional services, IT technical support and consulting services.

CIOs cited increasing technology costs as among their top challenges for 2022, along with the IT skills shortage and infrastructure changes needed to accommodate employees returning to work.

Rising prices, however, aren't necessarily denting CIOs' investment plans, according to Gartner, which recently updated its global IT market projections. The market researcher forecasts IT spending to grow 3% in 2022 compared with last year, reaching $4.5 trillion. Gartner's latest spending projection is consistent with its forecast published in Jan. 2022.

But one inflation-related shift is a push toward cloud spending, which Gartner expects to expand 22.1% in 2022. Gartner cited price increases and delivery uncertainty, worsened by Russia's invasion of Ukraine, as speeding up the transition of CIOs' purchasing models from IT asset ownership to as a service.

Rising prices for on-premises equipment seems to be contributing to the cloud shift. In the case of servers, inflationary pressure stems, at least in part, from chipset shortages that have affected a range of products. "We all know that the chipset market has been constrained in almost every form, whether it's automobiles or servers," said Robert Naegle, vice president analyst at Gartner.

Inflation is only the next phase in the supply chain challenge.

The hardware supply chain also includes the inert gases required for semiconductor manufacturing, Naegle noted. Ukraine is a key supplier of those gases, adding another wrinkle to a complex and fragile supply chain, which continues to feel the effects of COVID-19. "Inflation is only the next phase in the supply chain challenge," he said.

With hardware, CIOs can defer spending and extend the use of existing IT resources, Naegle noted. That's not quite the case for services, however, where many CIOs must turn to consultants and MSPs to supplement internal staff. Gartner earlier this year predicted higher IT services rates in 2022, as enterprise demand increases and providers raise salaries to combat attrition.

The PPI data bears out the trend toward increasing services prices, with the latest numbers showing a 0.67% month-over-month growth in prices in June.

One interesting wrinkle in the PPI data is that server and storage inflation showed signs of easing in June. Server prices dropped 1.2% month over month, reversing the pattern of steady price increases since September 2021. Storage prices dropped 0.42%. The coming months will indicate whether the price drops are a blip underscoring economic volatility or the beginning of a trend toward lower prices.

In the meantime, CIOs should use inflation as an opening to more rigorously examine their technology spending. Naegle said CIOs should critically evaluate the spending they are requesting, optimize the assets they already have and align IT investment with business outcomes.

"What I think this time really represents is an opportunity for many IT organizations to fine-tune their operations and look more aggressively at, 'Are we doing the right sort of things?'" Naegle said.