Two years into the pandemic, it’s getting tougher for Canadian households to avoid steep inflation.
The annual inflation rate hit a three-decade high of 5.7 per cent in February, and it’s only likely to get worse as the Russia-Ukraine war hampers the supply of key commodities. Roughly two-thirds of the products and services that make up the Consumer Price Index (CPI) – the country’s main gauge of inflation – have increased by more than 3 per cent over the past year – a far greater proportion seeing such sharp price growth than before the pandemic.
“This broadening in price pressures is a big concern,” Bank of Canada Governor Tiff Macklem said in a recent speech, noting that “everyday foods that are hard to substitute,” such as chicken and cereal, are getting pricier. “This is affecting more vulnerable members of society the most.”
Here’s a deeper look at why five products are becoming more expensive.
Two-year CPI change: 17.1 per cent
Western Canada is coming off its worst drought in decades. Last year grass was scarce, and feed for cattle shot up in price. Facing exorbitant costs, ranchers culled a larger proportion of their herds than usual. That, in turn, will limit future production, as fewer calves will be born. Furthermore, the meatpacking industry suffered several COVID-19 outbreaks, leading to the closure of processing plants.
Beef is often singled out by fast-food chains as a prime source of cost pressure. “We keep thinking that beef [inflation] is going to level off and then go down. It just hasn’t happened yet,” John Hartung, the chief financial officer of Chipotle Mexican Grill Inc., told analysts last month.
The White House has another explanation: profiteering. In a December news release, the Biden administration noted that the U.S. meat-processing industry is highly consolidated, with just a few key players, which have managed to ramp up their profit margins over the course of the pandemic despite higher input costs. “We’re seeing the dominant meat processors use their market power to extract bigger and bigger profit margins for themselves,” the release said.
Two-year CPI change: 21.1 per cent
Canada’s inflation basket includes something called the homeowners’ replacement cost index. This is a measure of depreciation, or the cost of maintaining a home’s value. While it represents a hypothetical cost, it is based on something very real: the price of new homes. It is also one of the few areas where Canada’s rollicking housing market – partly fuelled by low interest rates – has factored directly into inflation statistics.
Specifically, the index is based on the price of new home structures, not land. And the cost of building materials has soared. Over the pandemic, developers have tried to capitalize on the housing boom with more projects, leading to a shortage of key materials. The cost of building a typical detached home has risen by tens of thousands of dollars, simply because of higher lumber prices.
“It seems to change week to week, what the shortage is in,” said Toby Stolee, vice-president of construction at Sifton Properties Ltd. in London, Ont., who expects another year or so of such volatility.
Two-year CPI change: 14.4 per cent
Canadian households have bulked up their bank accounts during the pandemic, amassing roughly $300-billion in excess savings. They’ve been helped by financial support from Ottawa but also fewer opportunities to spend on services such as travel.
Instead, consumers have shifted their spending to goods, including items for the home. The trouble is that bulky appliances are largely made overseas, along with many other products in high demand – bicycles, couches and electronics. The shipping industry is straining under the volume, driving up container rates, which are getting passed on to consumers, who are waiting longer for those products to arrive. In particular, refrigerator prices have jumped 23 per cent over the past two years, while washing machines and dishwashers have risen 11.5 per cent.
Grill maker Weber Inc. said last month that it was paying three to four times more for the average shipping container than just a year earlier. Relief could be tough to come by: While freight rates peaked in September, they remain close to record highs, according to data from Drewry, a maritime consultancy.
Pet food and supplies
Two-year CPI change: 9.6 per cent
In economics, there is the concept of price elasticity – the degree to which demand for a product changes in relation to its price. It turns out the pet industry is somewhat inelastic, meaning consumers will shoulder higher prices to keep their furry friends happy.
“The pet industry has tended to be a recession buster,” Ron Coughlin, chief executive of Petco Health and Wellness Company Inc., which has more than 1,500 store locations, told an investor conference this month. “If anyone’s a cat parent here, you don’t really change your cat food because it’s very difficult and they’re very finicky.”
Many households purchased or adopted a pet in the pandemic, and retail figures suggest U.S. consumers loaded up on extra pet food. Producers have also been hit by higher input costs, contributing to price gains.
“There have been prices passed on by our vendors. We’ve been able to pass those through” to consumers, Mr. Coughlin said. He also noted that a decade-long trend toward premium food was unaffected by the pandemic. “We’re not seeing a down trade” to cheaper products.
Video and audio subscription services
Two-year CPI change: 9.3 per cent
Streaming giants are locked in a stiff competition to expand their subscriber bases. Yet that’s not leading to lower prices.
Netflix Inc. raised the monthly rate for Canadians on its standard plan by $1 to $16.49 this year and by $2 to $20.99 for its premium plan. Disney Plus recently raised its monthly price to $11.99 from $8.99. And Spotify Technologies Inc. has also hiked some prices.
Streaming platforms are spending billions to expand their content libraries and lure new customers, but for some established players (such as Netflix), user growth is slowing. The money to pay for all that content has to come from somewhere. “When we charge a little bit more, it’s about increasing that revenue to then reinvest in the service,” Netflix CFO Spencer Neumann told an investor conference this month.
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