Canadian food prices will remain high for a while yet, economists predict

Six times this year, the Bank of Canada has raised interest rates, citing the need to tame rampant inflation.

But when official inflation numbers for October are released Wednesday, there's one area most economists expect to remain stubbornly high: Your grocery bill.

There's a simple reason the jump in interest rates isn't taming food inflation, says Jim Stanford, senior economist at the Centre for Future Work: People need to eat.

The theory the Bank uses is consumers have too much money to spend, so we'll use higher interest rates to cut back their spending, and that will bring down prices.' That is iffy logic applied anywhere. But regarding the necessities of life, like food and shelter, it's ridiculous," said Stanford. Reducing disposable income through higher interest charges isn't going to solve food inflation. ... Demand for some things is reduced, but people are still going to have to eat.''

In September, as annual headline" inflation fell for the third straight month, dropping to 6.9 per cent, groceries continued to soar, with food prices rising 11.4 per cent, a 41-year high. Most economists surveyed by Bloomberg expect little change to the headline number when October statistics are released. TD Bank and IHS Markit believe the headline number fell to 6.7 per cent, while National Bank Financial's economics department believes it dropped to 6.8 per cent. Stanford, meanwhile, believes it rose to higher than 7 per cent, as does CIBC.

Just when we thought inflation was decelerating, a pop back up in gasoline prices likely drove a re-acceleration in October. The increase in pump prices this October contrasts with a decline during the same month of last year, " said CIBC senior economist Andrew Grantham, who notes CIBC is predicting a 7.2 per cent headline rate.

In October, food inflation was still likely higher than the overall headline number, said Pedro Antunes, chief economist at the Conference Board of Canada.

It's partly a matter of earlier commodity price increases working their way through the system to grocery store shelves, Antunes said. Grain, which soared earlier during the pandemic because of supply chain issues, and then because of Russia's invasion of Ukraine, must be milled into flour, then baked into bread. Canola seeds need to be processed into oil, which then needs to be made into margarine.

What's going on is the lagging impact of those very steep rises in food prices across the board. We saw increased prices for grains and oil seeds, and the war in Ukraine led to another round of increases," Antunes said. It took a while before we saw a hit, and it's going to take a while before it starts to come off."

Antunes agreed that food inflation is trickier for the Bank of Canada to rein in than many other parts of the Consumer Price Index.

When we think about what the Bank of Canada is trying to achieve in terms of easing domestic demand, food is something economists call very inelastic.' We don't see easing demand for food, typically. People might choose different items when they go to the grocery store but they've still got to eat," Antunes said..

The Bank raised its key overnight lending rate by 50 basis points (half a percentage point) to 3.75 per cent in October, and said more hikes were needed to fight inflation.

In July, the Bank stunned observers by raising the overnight rate by a full percentage point, to 2.5 per cent. The Bank also raised the rate in March, April, June and September by 25, 50, 50 and 75 basis points, respectively. The overnight rate began the year at 0.25 per cent, where it had been since the Bank dropped it three times in a month in March 2020, as the COVID-19 pandemic was declared.

Josh Rubin is a Toronto-based business reporter. Follow him on Twitter: @starbeer