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(HASAN JAMALI/Hasan Jamali/AP)
(HASAN JAMALI/Hasan Jamali/AP)

Rising energy prices could soon hit store shelves Add to ...

Higher energy costs that have been squeezing the profit margins of manufacturers for months could be closer to being passed on to consumers of all sorts of goods.

Soaring oil prices in March fueled the biggest one-month gain in almost two years for a Statistics Canada index that tracks the cost of raw materials used in the production process, helping to spur a second consecutive spike in the prices that factories charge retailers and wholesalers for products.

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The 5.7-per-cent gain in raw-material costs was due almost entirely to a 16-per-cent monthly increase for crude oil, the federal agency said. As a result, for the second month in a row, a related index of prices charged by producers rose 0.9 per cent, marking the fastest pace since mid-2008, when the spreading financial crisis interrupted an even sharper surge in oil prices.

"What we're seeing is a bit of an echo in the big runup of producer prices that we witnessed three years ago, when oil got up to over $140 (U.S.) a barrel," said Doug Porter, deputy chief economist at BMO Nesbitt Burns in Toronto. "The runup in oil prices so far in 2011 is affecting not just raw material prices, but the broader industrial product prices as well.''

The report suggests manufacturers' capacity to absorb higher costs without passing them onto their customers is starting to erode, which means more of those customers may soon need to raise their own prices to cover the added costs. The question is whether higher commodity prices will last long enough for that "pass-through" effect to take such a strong hold that broader inflation quickens beyond the Bank of Canada's comfort level.

The gauge of producer prices actually would have slipped 0.1 per cent had it not been boosted by factories that produce petroleum and coal products.

Still, some economists argue that central bankers like Bank of Canada Governor Mark Carney and U.S. Federal Reserve Board chairman Ben Bernanke could have less time than they may realize before inflationary pressures build throughout the economy and become harder to control.

"In recent announcements, both the Bank of Canada and the Federal Reserve sounded in no rush to begin tightening policy, with both viewing the recent rise in headline inflation as transitory," Mr. Porter wrote last week in a research note. "Yet, there is a clear danger that policy makers risk suddenly falling behind the inflation curve.''

Higher energy and food prices in March caused annual consumer price inflation to spike to 3.3 per cent, the fastest pace in 2½ years and well beyond the Bank of Canada's 2-per-cent target. But it remains an open question whether commodity-fuelled price gains will be long-lasting enough to put upward pressure on the biggest drivers of inflation, such as wages.

The central bank's preferred measure of annual price gains, which strips out volatile items like energy and fresh food, is at 1.7 per cent - higher than policy makers thought it would be at this point in the recovery, but still manageable.

Also, the economy unexpectedly shrank in February for the first time in five months, Statistics Canada reported Friday, suggesting that the so-called output gap - or slack left by the recession - will take longer than expected to chew up. That, plus an unemployment rate still well above 7 per cent, suggests there's little scope for retailers to raise prices by very much even as they watch their costs rise.

Some economists, such as Carl Weinberg of High Frequency Economics in Valhalla, N.Y., argue that tepid wage pressures mean higher energy and food costs will act as an overall disinflationary or even deflationary force by reducing the ability of households to spend on much else.

Statistics Canada reported early last month that in March, the year-over-year pace of average hourly wage growth accelerated to 2.7 per cent from 2.5 per cent in February.

This Friday, the agency will release employment data for April, which will give a better sense of whether wage pressures are rising.

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