Food, unlike gas, includes no uncertainty

 

Food, unlike gas, includes no uncertainty - price pressure can be predicted

 

By JAY BRYAN, The Gazette March 19, 2011

  

With rising food and oil prices upsetting people all over the world, Canada seems to be something of a safe haven, with the inflation rate for February actually falling. Sadly, it isn't true.

That's not to say that the Consumer Price Index is rigged, just that it looks backward. In early February, gas prices were near their low for this year. Since then, they've shot up. And the price of food has been very subdued, with imported items cheapened by a rising dollar, but that won't be so true in coming months.

Indeed, the price of food is headed for a very big jump by late this year, some analysts believe.

Economist Francis Fong at the TD Bank thinks food inflation will hit a rate of seven to eight per cent as Canadian food processors start passing through big global hikes in products such as wheat, corn and soybeans.

Douglas Porter, deputy chief economist at BMO Capital Markets, is inclined to agree, although he pegs the hike in food prices at a less painful five to seven per cent.

Already, the price of gas is likely jumping by about seven per cent this month from February's average, Porter estimates, squeezing household budgets just as people begin to think about road trips.

Happily, the overall outlook for inflation, while peppered with such distasteful elements, isn't all that bad.

For one thing, the starting point is excellent. Core inflation, the measure that's designed to track the longerterm trend, is at a record-low 0.9 per cent for February. Headline inflation, which adds in some volatile elements such as gas and food, is higher, but still a reasonable 2.2 per cent.

Ironically, inflation this year has been held down by profiteering. Last year, during the Vancouver Olympics, any space with a bed was enormously costly. As a result, the price index for accommodations in Vancouver plunged this February by a stunning 38 per cent, pulling down total inflation.

When this factor leaves the year-over-year inflation rate for March, core inflation is likely to rebound close to the 1.4 reading of January, Porter calculates.

After that, though, he doesn't see any huge price spikes, but rather "a slow burn" that will push prices up steadily through the year, triggering rising interest rates by around mid-year.

Gas might not be part of this, however. The BMO forecast is for oil to average $95 U.S. this year, or several dollars below today's price. But that depends on an end to turmoil in oil-producing countries of the Mideast, something that's far from certain.

Food, unfortunately, includes no such uncertainty. Fong notes that we can predict quite accurately when price pressures will hit Canada: just look at trends on global markets, then wait nine to 12 months for these to work their way into Canadian products.

We enjoy this delay because food producers in this country delay hiking their prices for a while in order to avoid losing sales to competitors. All are hoping that any increase won't go too high. But this time, it did.

Global prices have been rising for the past couple of years, but the real spike hit late in 2010, with a United Nations food-price index shooting up 40 per cent since last June.

The key reason was bad weather all over the world, but humans managed to worsen the situation by using key food crops like corn to produce subsidized biofuel.

At the same time, some countries have turned to stockpiling or imposing export limits on some foods, creating still more scarcity. Finally, financial speculators jumped into the action, bidding up prices as they jumped into a rising market.

Already, Canadian food companies and supermarket chains are beginning to warn of higher prices ahead, and Fong's best guess is that they'll rise faster and faster until about this autumn.

Still, there are a couple of bits of good news in this scenario. First, Canada's price hike will be much smaller than the double-digit increases in emerging markets.

That's largely because more of our food is processed and ready to eat, or at least to heat, so the cost of the raw material is a smaller part of the total price. For instance, a loaf of bread that might cost $3 or so contains only about 15 cents worth of wheat.

Second, there's reason to think that prices will stabilize not too many months after food inflation peaks. Fong notes that with better growing weather, wheat, corn and soybean prices on global markets are already trending down.

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