Light at the end of the food inflation tunnel?

July 28, 2022   ·   0 Comments

By Sylvain Charlebois

Once again, the numbers coming out of Statistics Canada were discouraging. The food inflation rate in the country was 8.8 per cent in June, which is still higher than the general inflation rate.

Everyone is affected by higher food prices. Americans learned last week that food inflation at the grocery store was 12.4 per cent, a 41-year high.

Despite all this, consumers can see some light at the end of the long tunnel we’ve all been passing through in recent years.

First, I believe food inflation in Canada may have already peaked. Supply chain challenges are still there, making the movement of goods more expensive, but things are slowly improving. Pandemic protocols around the globe are increasingly becoming predictable, making logistical planning much easier. In February, the Russian invasion of Ukraine pushed commodity prices higher, making input costs an issue for most farmers and food manufacturers. But this seems to have stabilized as well.

Markets are much calmer than before and, most importantly, more predictable. If nature continues to cooperate, Canada’s agricultural sector should see a strong harvest this year, helping to keep commodity prices lower and costs down. Again, more good news.

Since March, food sales at dollar stores have increased by 18 per cent, according to NielsenIQ. Sales at discount stores have also increased by five per cent since that period, so consumers are clearly trading down, and grocers know it. More discount store conversions are on the way in Canada. We have seen at least 15 new major discount stores in the country so far this year alone. Depending on the week, consumers can save between 25 per cent to 40 per cent at a discount store, compared to a regular grocery outlet.

But the Canadian Dairy Commission played party pooper by recommending an unprecedented second increase of 2.5 per cent for September 1, as schools open in the fall. This latest increase comes after a record 8.4 per cent hike in February. As a result, the price of butter is up almost 20 per cent since December. In some markets, fluid milk is 25 per cent more expensive than last winter. The 2.5 per cent at the farm will look more like six per cent to 10 per cent at retail, for all consumers. As prices stabilize in most sections of the grocery store, dairy will continue to be the exception for a while.

To add insult to injury, we also learned last week that executives at the Canadian Dairy Commission – federal employees – received bonuses last year. The Crown corporation refused to disclose the amounts or reasons that bonuses were given. There’s nothing wrong with bonuses, but the lack of transparency is simply unacceptable. Taxpayers and consumers deserve better. Our quota system was designed to make our dairy sector immune to inflationary cycles. Something is not working.

Interest rates are also going up. Last week, the Bank of Canada made an almost unprecedented move, delivering a jolt to consumers everywhere by raising its benchmark interest rate a full percentage point. This is the biggest one-time increase since August 1998.

Since the announcement, mortgage brokers have been busy. For many households, the cost of shelter spiked, making it harder to spend on anything else.

But food is a necessity. Before the interest rate hikes, the market was flooded with cash, and some consumers had no qualms about paying $28 for a T-bone steak which obviously contributed to higher prices in our economy, including at the grocery store, especially for premium products and categories. As fewer people can now afford a $28 T-bone steak, we are expecting some prices to soften or even drop a little. Simple food economics.

With higher rates, though, our Canadian dollar will strengthen against the American greenback, making imports cheaper. And we do import many food products. This will likely help consumers who purchase centre-of-the-store dry goods, whose prices have skyrocketed recently. But the American Federal Reserve is also planning another rate increase, which could put pressure on our dollar. Interesting times. Higher rates are bad news for mortgage owners but good news for imports.

Overall, we should not expect prices to drop anytime soon, year to year, but the rate at which food prices are rising is slowing down. Food inflation is critical for our food economy, but a 10 per cent rate is not sustainable. As predicted in December of last year by Canada’s Food Price Report 2022, we should end the year at about seven per cent, as forecasted, unless some other geopolitical crisis occurs.

This is still high, but it’s not 10 per cent.

Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.

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