Grocery store wars expected to cool food prices

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Hot food inflation has left many Canadians gasping this year, but the pace of increases should cool off next year as competition heats up among grocery stores.

Retail food prices are expected to rise no more than 2 per cent in 2012, a report to be released Monday by the University of Guelph says.

That's less than half the current pace of food inflation, which is running at 4.3 per cent. Any cooling of food prices will no doubt come as a relief to households, which are struggling with high levels of consumer debt, tepid wage increases and a rising cost of living.

"It's been a hard year for Canadian consumers in food retail stores, especially those with less means," said Sylvain Charlebois, associate dean of research and graduate studies at Guelph's College of Management and Economics. "2012 will likely be a year where food prices will give consumers a welcome break."

A range of factors have driven up food prices this year – from higher feed costs to volatile weather patterns and a diminished impact from the currency. Canada is not alone – the United Nations measure of world food prices hit a record in February, though prices have since eased.

Competition is a key reason for an expected moderation in Canada. Wal-Mart Canada is opening new super-centres next year, while Target is planning on entering the Canadian market in 2013. Both moves are expected to put pressure on Canada's existing grocers – Loblaw, Sobeys and Metro – to trim prices to hang on to market share.

"The Canadian consumer will benefit from what will likely happen in the next couple of years in the food distribution sector," said Prof. Charlebois, who co-wrote the food price forecast with Guelph economics professor Francis Tapon. "There will likely be a price war."

Canada's food inflation has been running above the 4-per-cent mark for the past five straight months, a much hotter pace than the overall rate of inflation which is currently 2.9 per cent. The Bank of Canada, too, sees food inflation subsiding next year.

Any food price increases will have a bigger impact on poorer households. The one-fifth of Canadian households with the lowest income spend 16.3 per cent of their budgets on food. By contrast, the richest one-fifth allocate about 7.5 per cent to food, according to Statscan's survey of household spending.

Canadians, on average, devote about 10 per cent of their household budgets to food, a share that has diminished considerably from 30 years ago when it was about a quarter of the budget, Prof. Charlebois said.

The university sees meat prices rising by no more than 3 per cent. Bakery goods, whose prices have escalated rapidly in the past two years, are seen increasing 3 per cent amid softening commodity prices.

Elsewhere, Canada's strong currency should keep a check on import prices, limiting fresh vegetable price increases to between 1 per cent and 3 per cent. Restaurant price increases – which are typically more difficult to predict – should stay below 2 per cent.

Meantime, squeezed households will curtail consumption of pricier products, such as organic foods, in favour of cheaper conventional fare, the university said.

Food prices are tricky to predict because so many factors can affect their prices. The university's forecast last year came close though – it expected prices would rise between 5 per cent and 7 per cent this year. As of October, food prices in stores are up 4.9 per cent, meaning it missed its target by just 0.1 per cent.