A new report from economists with Royal Bank of Canada predicts food inflation will slow in Canada, but prices will stay high amid lasting challenges such as increasingly frequent severe weather events.
“While we continue to expect lower food inflation in the current economic cycle, we don’t expect food prices to return to pre-pandemic levels,” the authors of the June 14 report concluded.
DISRUPTIONS RECEDING
Food costs have risen by 18 per cent over the past two years. Grocery store prices peaked in January, and were still 8.3 per cent higher than the year earlier as of April.
But economists Nathan Janzen and Claire Fan said factors contributing to soaring costs have started to moderate.
Geopolitical worries over Russia’s invasion of Ukraine and global supply chain disruptions have receded, and domestic transportation costs for supplies have “changed direction” this year, the report said.
The latest Business Outlook Survey from the Bank of Canada “flagged even more positive signs when it comes to businesses’ price-setting,” the report added, as “more are expecting slower growth and less frequent adjustments to their output prices in the year ahead.”
Excess household savings from the pandemic, which made some Canadians perhaps willing to absorb higher sticker costs, are also diminishing, the economists noted, while high interest rates and inflation put pressure on people’s budgets. That could in turn lead to lower food prices as people change their spending habits during tough economic times.
“When higher prices and debt payments dig in individuals tend to either cut back on pricier items or substitute them with cheaper options,” the report said.
“Deteriorating purchasing power should continue to dampen demand before ultimately putting a drag on inflation more broadly, but also on the pace of food price increases.”
EXTREME WEATHER IMPACT
Despite the outlook for slower food inflation, the economists cautioned that lingering factors “suggest prices won’t drop outright.”
Severe drought in Canada’s Prairie provinces hit domestic crop production in 2021, the report said, and climate-change induced weather extremes are expected to remain a challenge going forward.
Extreme weather events are becoming more frequent and could limit production on farms, the report said, impacting food supply chains and keeping upward pressure on food inflation.
“Record low livestock herd sizes reported recently in Canada and the United States is a great example, as it is an aftermath of earlier drought conditions that forced producers to cut back because of pricier feed,” the report said.
Labour shortages are also expected to remain a challenge when it comes to inflation, the report said, with Canada’s aging population “squeezing the supply of workers in the decades ahead while supporting wage growth.”
