Food inflation could be nearing a peak, new analysis from Canadian Imperial Bank of Commerce shows.
CIBC economists Andrew Grantham and Karyne Charbonneau predict food inflation will start falling in the second half of this year, which would be a relief from the biggest increases in grocery prices since the 1980s. Their forecast is based on a number of changes, including the value of Canadian dollar, falling costs for imported food and post-pandemic spending burnout.
“The good news is that, by the second half of this year, there should be some relief at the grocery stores. We should have already seen the biggest hit from last year’s exchange rate depreciation on food prices and other items,” Grantham and Charbonneau said in their analysis, released on March 15.
Inflation has been on a tear since late 2021, rising to 8.1 per cent in June 2022, a four-decade high. But, food inflation has consistently outpaced the headline reading of the consumer price index (CPI). Most recently, year-over-year increases of food purchased at grocery stores surged to 11.4 per cent, even as the broader CPI slowed to 5.9 per cent.
During Canadians’ recent struggle with inflation, the cost of food has been hit by the depreciation of the loonie versus the U.S. dollar, which makes imports more expensive. Grantham and Charbonneau said in their note that the Canadian dollar would need to depreciate to $1.43 by the end of the year if the “inflationary impact of the currency is to remain as large as it has been in recent months.”
The Canadian dollar is currently trading at $1.37, or 72 cents U.S. CIBC forecasts the loonie will end 2023 at $1.33.
Grocery bills should also fall because global food prices are “softening,” the economists said, adding they expect consumers to benefit at the grocery store because the inflation rate on imported food has “decreased quite sharply.”
Imported food inflation was 7.5 per cent in December 2022. In June 2022, when the CPI hit that scary high, imported foods prices surged 15.3 per cent year over year, according to data from CIBC.
However, “that (drop) has yet to translate into prices,” the pair said.
Canada’s grocery store market — dominated by five major companies, Loblaw Cos. Ltd., Empire Co. Ltd., Metro Inc., Costco Wholesale Corp. and Walmart Inc. that control roughly 80 per cent of groceries sold in Canada — also came up in the CIBC commentary.
“While lack of competition is often blamed, other operating costs are also playing a role, including transportation,” Grantham and Charbonneau said, noting that prices for diesel — the fuel transport trucks use — have come down significantly after rising 74.4 per cent year over year in June 2022 and “should be good news for food costs in the second half of the year.”
It also appears that Canadians have come off of their post-pandemic need to spend after months of lockdown, more “good news” for food inflation, the economists said.
Typically, when consumers paid more on essential items such as groceries and gas, they tended to spend less in non-essential areas like restaurants and travel. That expectation got turned on its head during COVID. In the aftermath of the lockdowns, Canadians went on a spending spree, buying food at grocery stores and hitting restaurants, even though prices were high.
“However, we are starting to see signs that consumer behaviour is returning to normalcy, which could have disinflationary consequences,” the economists said.
Meanwhile, the latest retail report from Statistics Canada revealed evidence that Canadians are switching from buying at traditional grocery stores to lower-cost bulk operations.
“These are all signs of a change in behaviour amid pressure on household finances from inflation and rising interest rates which could signal a reduced ability for companies to pass on cost increases in such rapid price hikes,” they said.
Statistics Canada will release inflation numbers for February on March 21.