Expected price relief has been slow to materialize
With the economy downshifting into low gear and quite likely to stay there, you’d expect that we’d at least be getting some relief on the prices we pay. Not yet, it seems. We discovered yesterday that consumer prices rose considerably faster than forecasters expected in August, jumping back above the comfort level of the Bank of Canada. But happily for the inflation outlook – although not so much for the whole economy – this price surge is likely to be sapped quite soon by slow economic growth. The big surprise in August was an unexpected and very big jump in the price of cars, juicy couture something analysts wouldn’t have expected to see until September, when it would line up with the introduction of new models. Normally, you’d expect to see August bring a small drop in auto prices during the quiet summer selling season, said economist Robert Kavcic at BMO Capital Markets. Instead, the average price of a car jumped by 1.3 per cent, pushing up the transportation portion of the Consumer Price Index to a big 0.8 per cent monthly gain. Kavcic pointed out, however, that in what has been anything but a normal selling season, maybe this shouldn’t have come as a big surprise. Automakers introduced steep incentive-driven discounts in June, earlier than such bargains would be usual, in an effort to lure back consumers who had been put off by sparsely stocked showrooms in the spring. That’s when shortages triggered by the Japanese earthquake halted shipments of many models. With the discounting having begun early, perhaps car companies felt it was too costly to continue them through the entire summer. In any event, the discounting that has now ended can’t end again, so auto prices are likely to settle down. A bunch of other things were also up in August, but not by enough to make a big difference in the key number – the 12-month inflation reading of 3.1 per cent. What did make a difference here was the past year’s huge jump in gasoline and outsized, although smaller, rise in the price of food. Gas prices have actually been drifting down for the past few months, but not enough to erase the big jump we saw early in the year. Gasoline is up by 22.8 per cent over the past 12 months, the biggest contributor by far to our high inflation. In Quebec, the impact is much worse, with a leap of 27.1 per cent, and Ontario drivers also fared badly, with a jump of 25.4 per cent. Food prices are somewhat better-behaved, but still show the second-biggest rise among the eight categories tracked by Statistics Canada. Total food spending of a typical family is up by 4.4 per cent from a year ago. Ironically, frugal families who don’t dine out often were hit especially hard, with food from grocery stores up by 5 per cent. Food from restaurants rose by just 2.7 per cent. This reflects the fact that grocery prices are being driven largely by the rising prices of the commodities, like grain, that go into producing so many food products. In a restaurant, of course, a large part of the price is for preparation and service, so the cost of basic ingredients has a smaller impact. Although shoppers are partly at the mercy of weather and other crop conditions when it comes to food prices, there are some hopeful signs for the year to come. For one thing, Kavcic has noticed the prices of some agricultural commodities weakening, which suggests that there won’t be as much upward pressure on the shelf prices of many grocery items. For another, competition for food shoppers is heating up in Canada, with expanded grocery departments at Walmart stores and the imminent arrival of the Target chain putting pressure on all retailers to control price hikes. Gasoline should also continue its gradual drift downward, Kavcic guesses. It’s very hard to predict where petroleum prices will go, but they’re strongly influenced by demand, which has weakened significantly in the past six months and doesn’t look likely to rebound very soon. Indeed, the weakness of demand should shape the outlook for all kinds of prices in the year to come.
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