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Rising food, fuel prices squeeze consumers

Consumers are shifting their spending as higher gasoline and food prices strain family budgets, leaving less money for discretionary items such as trips and clothes.

Households will face even tougher spending choices in the months ahead as an expected hike in interest rates takes yet another bite out of their finances.

With Canadians already grappling with record household debt, higher energy and food prices are expected to curb spending in some areas, as well as reduce overall economic growth since consumer spending accounts for 60 per cent of the economy.

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A pair of reports - on inflation and retail sales - from Statistics Canada on Friday gave an early glimpse of how increasing pain at the pumps and in the grocery aisles is already forcing consumers to reprioritize their spending.

Although inflation in April was slightly tamer than originally forecast, the federal agency's latest reading of the consumer price index suggested that Canadians are being walloped by higher energy and food prices - essentials that are difficult to cut back on.

"Energy costs are rising quite quickly - not just gasoline prices but energy costs for homes, so electricity, water and fuel," said Diana Petramala, an economist with Toronto-Dominion Bank.

"All of this tends to eat into household wallets and leave less money left over for discretionary items."

Statistic Canada's inflation report showed consumer prices increased 3.3 per cent over the 12 months ending in April, as energy prices surged 17.1 per cent over that same period.

Gas prices were fingered as a major culprit, with a 26.4-per-cent year-over-year jump, while prices for electricity and fuel oil increased by 7 per cent and 32.4 per cent, respectively.

At the same time, prices for store-bought food rose by 3.7 per cent over April, 2010, with the biggest sticker shock on staples such as meat, bakery products and fresh vegetables.

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"Tell the average Canadian that CPI [the consumer price index]in April was 'weaker than expected' and you may elicit blank stares," Emanuella Enenajor, an economist with CIBC World Markets Inc., wrote in a research note.

"Indeed, prices were up 3.3 per cent annually, just a tick below consensus. But the above-target pace of price gains, driven by food and energy, still suggests Canadians are paying more to fill their gas tanks and bellies."

Excluding volatile items such as energy and food, the Bank of Canada's core inflation reading increased by 1.6 per cent in the 12 months ending in April - a tad less than in March.

That core reading provides little comfort to consumers like Joe Faria, a Toronto lifeguard instructor, whose family spends nearly $500 a month on gas, up from about $300 earlier this year. Mr. Faria has started walking to work and clamping down on all non-essential spending. "This long weekend we are not going to be going anywhere, just due to high gas prices and everything else generally being up in price."

A separate Statistics Canada report on retail sales, meanwhile, showed where Canadians are spending the bulk of their money. Even though overall retail sales were unchanged at $37.3-billion in March, gas stations recorded the fattest increase at 1.4 per cent.

Sales at supermarkets and other food stores were also up, and food inflation is emerging as the biggest risk to household budgets. Ms. Petramala expects food prices to rise by 7 to 8 per cent over the next six months.

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Food inflation is coming at a time when Canadians' debt-to-income ratio has stabilized at 147 per cent.

"We know that interest rates are going to increase soon; our anticipation is come September," Ms. Petramala said. "And this is definitely going to eat into households' income."

Evan and Melissa Ashenhurst say higher gas prices are already making it harder to pay down their debt.

"Gas prices definitely impact that because an extra $200 spent on gas is an extra $200 that we can't put on debt," Mr. Ashenhurst said.

The couple, who live in Uxbridge, Ont., northeast of Toronto, are paying about $600 a month on gas compared with $400 a few months ago.

Cutting back on gas is not an option for Melissa Ashenhurst. On Thursday alone, she drove a whopping 287 kilometres for her job as a visiting nurse, for which she is reimbursed 38 cents a kilometre by her employer.

"We walk to do grocery shopping. We walk an hour each way to go to Wal-Mart now if we need to," Mr. Ashenhurst said. "If we can walk, we walk."

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