Higher food prices are here to stay
Despite a negative inflation rate, recent StatsCan numbers are telling us that we are in for a wild ride at the grocery store. While the general inflation rate sits at -0.2%, the food inflation rate is at 3.4%. In December 2019, Canada’s Food Price Report forecasted a food inflation rate of about 4% for 2020, and this is very much where this year is heading. But COVID-19’s economic shock will likely be long lasting and will affect grocery shoppers’ pocketbooks for quite some time.
Inflation has not been an issue in Canada for the past decade. It came close to 4% in 2011 and that’s about it. We have seen some decoupling between the general and food inflation before, but nothing like this. Now, food prices are increasing almost four times more rapidly than the price of any other durable goods in the economy, and the Consumer Price Index is not reflecting the actual costs households are facing due to lockdowns. We are all consuming differently. Still, the difference between the two is huge.
During COVID-19, food service, a sector which generates more than $90 billion of revenues a year in Canada, essentially disappeared over night. Lockdowns forced the entire food industry to adjust quickly to a change in our economy. That shock was swiftly transmitted to the demand side, as households were hit by layoffs and lower incomes. Financial markets were then hit hard by the uncertainty, not knowing when the pandemic and lockdowns would end. This is unlike other recessions where a slowdown is triggered by a shift in demand, which leads to subsequent market pressures to cut supply. That is what our textbooks tell us. COVID-19 is essentially a one-two punch to the system; where the economy, supply, and demand were hit hard. There is no textbook for that.
Once confinement measures loosen and Canadians can go out, shop, visit restaurants and do other normal activities to support the economy, the question is whether Canadians will show up. If lingering fears of contagion and of a possible second wave and uncertainty about household incomes prevail, the likely outcome is deflation or at least a price drop on most items. ‘Deflation’ is likely the scariest word for any economist. It is like cancer to an economy. It’s hard to end deflation and grow an economy when consumers know that what they want to buy today will be cheaper tomorrow. That could impact clothing, cars, houses, you name it. Taxes will go up, putting more pressure on consumer demand. So economically, let’s hope Canadians do their part.
Food, though, will likely buck the deflationary trend for an extended period. Unlike what many analysts have often said, the food sector is not recession-proof as consumers will either trade down or will not go out as much. But, with COVID-19, nobody has been going out to restaurants and consumers aren’t celebrating their lockdowns over caviar either. Most of us went back to cooking, baking and making bread. Consumer demand now has a COVID-19 benchmark. Deflation or not, we need to eat.
Yet, on the supply side, COVID-19 is making everything more expensive to produce, process, distribute and retail. New cleaning protocols, higher salaries, building infrastructure for e-commerce to accommodate consumers who no longer want to physically grocery shop, will all cost more. Plant shutdowns and food safety issues are the last things the food industry needs. With online shopping being more popular, delivery costs will also need to be covered by consumers, whether we like it or not. Food has always been a high-volume, low-margin business and that is not going to change. For industry, covering the cost to produce and distribute food, and asking consumers to pay more will not change either. COVID-19 is impacting the entire planet and we can’t import our way out of this scenario.
As a result, we could see the average Canadian family devote a much greater percentage of their budget on food. Pre-COVID, roughly 9% of our budget was devoted to food. It is one of the lowest percentages in the world. That could rise to 11% or even 12% by 2022. In fact, given lockdowns, that percentage is likely much higher right now. In comparison, Americans are at 6% or 7%, whereas, Europeans will spend about 15%. Their percentage will likely change as well. In 1970, Canadian households were spending 21% of their budgets on food. So, in a sense, we are going back in time.
Simply put, current food economics are forcing us to revisit the social contract we have with food, perhaps for the betterment of society. Valuing food can only have a positive socio-economic impact, and make us more food literate. Such a shift in food prices are relative to what else is going on in the economy, however, and will leave many behind as food insecurity levels in many parts of our country soar. Single parents, children, and underprivileged demographic groups, will require more attention as we embark into a new food era.
Even if food prices have been rising since March, most households are spending less on food. Each household in Canada is saving approximately $5 a day by just cooking at home and avoiding restaurants. That is roughly more than $345 since the beginning of the pandemic, which far exceeds price hikes shoppers needed to absorb during the same period.
Any way we look at it, COVID-19 will have a long-lasting impact on our relationship with food, and no one is immune to that.