Food deflation in America. Is Canada next?

Feel sorry for your U.S. grocer brothers this fall.

Nothing to do with Donald Trump’s chances of winning the White House, mind you. Instead, have sympathy because the U.S. supermarket business is in a funk.

Food prices have been falling most of the year in America. The Wall Street Journal reports prices are on track for the longest stretch of declines in half a century.

A few numbers to ponder: U.S. food prices at home are down 1.6% this year to July. That’s the good news. The bad: some categories are seeing black-hole collapses: milk is down 11%, a dozen eggs 40%.

Reasons for the fall are numerous. There’s a surplus of grain, dairy and meat. The surging American dollar is having an impact, too. So are cheaper energy costs.

Lower prices at the till are fabulous for consumers, but not so good for supermarkets. Many are struggling to maintain margins. And the public grocers are watching their share prices fall. Kroger’s stock is down 26% this year and Whole Foods 16%.

Many of you will recall three and four years ago when Canadian food prices were seeing little to no growth and, in some cases, deflation. Those weren’t great times, and no one wants to go there again.

But seeing what’s happening stateside, is there any chance of Canada falling back into food deflation? For now, the answer seems no.

Peter Sklar, the respected BMO Capital Markets analyst, recently looked at the falling American grocery market and observed that while, indeed, Canada’s food-from-store Consumer Price Index is not rising as fast as last year, it’s still inching forward (up 0.4% in August). And the country’s three public grocery chains (Loblaw, Metro and Sobeys) reported second-quarter inflation of 1.5%.

Deflation could occur, of course, if the major grocery chains sharpen their pencils and offer more discounts in order to capture market share.

However, Sklar points to a key difference between the U.S. and Canadian grocery markets: There are simply more grocery chains in the U.S., resulting in more promotional activity among rivals, “which has led to grocery deflation in the industry.”

Canada has fewer big chains and they appear uninterested in an intense price war.

Or, as Sklar notes in his report, Canada's grocers "have ceded some of their market share to Walmart and Costco, and compete against each other on a relatively rational level for the remainder of Canadian grocer spending.”

Rational is always better—in elections and in supermarket pricing.  So no deflation… for now, anyway.