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In December, the price of household appliances fell 4.1 per cent, the largest monthly decline on record.Steven Senne/The Associated Press

The surge of inflation over the past two years was bolstered by rising durable-goods prices. Now, as supply chains improve and consumer spending on big-ticket items contracts, prices for these products are leading inflation back down.

The COVID-19 pandemic wreaked havoc on the production of appliances, electronics and other manufactured goods, which are often built overseas and rely on seamless transportation by ship, rail or highway. With a lack of inventory and skyrocketing transportation costs, prices for those goods shot up.

The situation is now shifting dramatically. Squeezed by high prices and rising interest rates, Canadians are cutting back spending on non-essential items, particularly those requiring financing. At the same time, the transportation bottlenecks that plagued manufacturers and retailers through 2021 and much of 2022, have largely become unclogged.

These changes are feeding through to consumer prices. In December, the price of household appliances fell 4.1 per cent, the largest monthly decline on record. Furniture prices dropped 1.6 per cent. Passenger vehicles, which had soared in price owing to a shortage of computer chips, have experienced very little inflation for several months.

Overall, prices for durable goods have increased 4.7 per cent over the past year, lagging the 5.6-per-cent pace for services. If anything, central bankers are more concerned about services inflation than supply pressures that are dissipating quickly.

The reversal is a story of both supply and demand. Consumers are becoming more price sensitive and looking for bargains. Meanwhile, retailers who over-ordered inventory during the worst period of the supply-chain challenges are offering discounts to clear their warehouses. And they’re leaning on their suppliers to cut costs.

“You’re going to see a swing in the pendulum, away from where suppliers had pricing power based on shortages and a spotty ability to be able to supply. I think 2023 is shaping up for the year of cost cutting and cost reduction,” said Fraser Johnson, a business professor at Western University who focuses on management of supply chains.

The improvement in supply chains has been dramatic. At the height of the pandemic, consumers spent heavily on home renovations and goods they could use during lockdowns. Because most of these products are manufactured in China, the surge in demand crashed transportation networks, particularly those coming through the West Coast of North America.

The cost of shipping a 40-foot container from Shanghai to Los Angeles rose from around US$1,500 before the pandemic to a peak of US$12,400 in September, 2021, with spot prices even higher. Container ships piled up at anchor off the ports of Los Angeles and Vancouver, while retailers and manufacturers in Canada and the U.S. waited months for the delivery of products and parts.

“It was a total mess for at least a year and a half,” said Manny Calandrino, chief executive officer of transportation and logistics company Fastfrate Group.

Things began to normalize through the middle of 2022, as consumer spending shifted back toward services, and rail and trucking companies began to clear out backlogs. The cost of a container shipment from Shanghai to L.A. has fallen to around US$2,000.

“It’s gone from, ‘just take it and deliver it whenever you can’ to, ‘we’ll get it there on such a day, such a time.’ So there’s normality again. All the delays, the stores with empty shelves, I think we’re going to see that disappear,” Mr. Calandrino said.

There is one spot where bottlenecks remain. Warehouses on the outskirts of Canada’s major cities are stuffed with inventory. Fearing delays and product shortages, many companies ordered two or three times the inventory they needed. They’re now having to offer deals to try to clear out some of the excess product – one of the sources of flatlining or declining prices.

“While [shipping] volumes are clearly trailing off, there’s this residual of lots of warehouses full of things that have not been sold, particularly in Eastern Canada,” said Peter Xotta, vice-president operations and supply chain at the Vancouver Fraser Port Authority. “That’s continuing to cause a bit of a delay in restoring kind of normal course of operations through Vancouver.”

While transportation costs have come down and companies have begun more aggressive discounting, consumer spending has also started to contract in response to the Bank of Canada’s aggressive interest-rate hikes.

Over the past year, sales at furniture and home-furnishing stores have tumbled 12.4 per cent in inflation-adjusted terms, according to Statistics Canada. Purchases at vehicle and parts dealers have dropped 3.7 per cent, while those at electronics and appliance stores are down 2.7 per cent.

Moreover, a central bank survey, published earlier this week, found that a growing proportion of consumers say they’re planning to delay their purchases, or will reduce spending and save more.

“We know that higher interest rates always work their way through the economy, first through the housing market and durable-goods purchases – things that you would tend to use leverage for,” said Royce Mendes, head of macro strategy at Desjardins Securities. “So it is very likely that the declines in prices for things like cars, electronics or appliances, is a combination of both supply and demand.”

Industries tied to the housing market and home renovations are getting hammered particularly hard by rising interest rates.

Whirlpool Corp., the manufacturer of home appliances, said net sales in the third quarter of 2022 were nearly 13 per cent lower than a year earlier. The company has cut global production by 35 per cent to meet the drop in demand. Marc Bitzer, the company’s CEO, told analysts in October that “short-term consumer sentiment and consumer demand are clearly reflective of a recessionary environment.”

Likewise, sales at Leon’s Furniture Ltd. have sagged from record heights in 2021.

“Moving toward year end, we expect the market to get more promotional as inflationary pressures on discretionary income continue to impact consumer spending,” Mike Walsh, the company’s CEO, said in an earnings release in November.

The slowdown in goods inflation is boon for the Bank of Canada. The central bank misread the runup in inflation in 2021 and early 2022 partly because it underestimated the strength and persistence of supply-chain disruptions.

Now that supply chains are improving and goods prices are levelling off, the bank appears to be nearing the end of its cycle of interest-rate hikes. Its next rate decision is on Jan. 25. Analysts widely expect one more quarter-point rate hike before the central bank hits pause.

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