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Canadian food prices to rise by up to 8%, TD warns

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Food prices to rise Canadians haven't yet had to struggle too much with food inflation, but that's about to change, Toronto-Dominion Bank warns today, forecasting food prices will probably climb by 7 per cent to 8 per cent, and stay there for about eight or nine months.

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"Canadians need to be prepared for rising food prices," economist Francis Fong said in a research report.

"... How long those increases persist will be determined by a host of supply and demand factors. We anticipate that these weather systems will eventually fade, as they have in past cycles. As such, the supply response to these elevated prices should help normalize markets for these commodities and bring price levels back down to manageable levels. In turn, this will feed into more moderate food price inflation here in Canada."

But even if commodity prices were to begin to fall now, high food inflation would still be with us for up to nine months, according to the report.

"There remain a host of risks that could potentially help support an elevated level of commodity prices and, thus, food prices. Prolonged protectionism, additional poor weather, and stronger-than-expected emerging market growth will all factor into the direction and momentum of global food prices in the coming months."

Globally, food prices have been hitting records month after month, according to the Food and Agricultural Organization of the United Nations.

The TD report cited extreme weather, with droughts in China, for example, and floods in Australia, responses by governments to ban exports or set quotes, and speculators.

"Speculators appear to be playing a role in driving up prices," the TD economist said. "While fundamentals ultimately drive long-term movements in commodity prices, a consensus is building that investors chasing short-term returns can add to short-term price volatility. Low returns on fixed-income investments and rising risk appetite appear to be the main driver of investor demand."

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Inflation dips The TD report on food prices came as a fresh reading of the consumer price index showed Canada appears to be immune from inflationary pressures faced by other countries - for now.

Consumer prices climbed 0.3 per cent in February, Statistics Canada said today, bringing the annual overall inflation rate to 2.2 per cent from 2.3 per cent in January. The so-called core rate, which strips out volatile items and guides the Bank of Canada, fell to a surprising 0.9 per cent from 1.4 per cent.

But that dip in the core rate was due to a special factor related to hotel charges during the Olympics, which won't be there when the March rate is calculated, said Douglas Porter, deputy chief economist of BMO Nesbitt Burns.

"While the rest of the world seems to be grappling with rising inflation pressures, Canada is going in the opposite direction - both headline and core inflation have eased since the start of the year," Mr. Porter said.

"This is set to reverse next month, as Canada gets with the global program, but the low starting point is very favourable."

Today's reading gives Bank of Canada Governor Mark Carney even more breathing room to sit back and watch global developments before raising his benchmark lending rate.

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"With respect to policy response, this reading is significantly below what the BoC was monitoring," said strategists Mark Chandler and Kam Bath of RBC Dominion Securities.

"The core annual inflation rate for February leaves the January/February average at 1.2 per cent versus expected 1.4 per cent for [the first quarter] as a whole. A bounce back to 1.3 per cent or so in the March core inflation rate looks likely at this stage. These inflation numbers will certainly add debate to the timing of the first rate hike by the BoC - arguably favouring more the July/September camp - but the activity data have been very firm and the need for intermediate rate hikes remains intact."

Stocks up, yen down Global stocks rose today and the yen fell after the extraordinary decision by the Group of Seven to intervene in currency markets and help Japan through its crisis as the world eyes its stricken nuclear plant.

"Co-ordinated action overnight by G7 countries to sell the yen, after the currency's recent rally, seems to have helped shift sentiment in equity markets despite the worsening situation at Fukushima," said Yusuf Heusen, senior sales trader at IG Index.

"Moving into the weekend break, there's without doubt going to be a desire for traders to square-off risk - the nuclear crisis has already been upgraded to put it on a par with Three Mile Island and, with the IAEA labelling it as a race against time, there's going to be little desire to get caught on the wrong side of any panic reaction once the markets close," he said in a research note.

"This G7 intervention is likely to shore up stocks on Wall Street, with the Dow currently forecast to add around 50 points at the open, but with little in the way of economic or corporate data due in the hours ahead, trader sentiment is again likely to dominate.

"The situation in Libya is also going to remain very much on the radar after the UN authorized military action, but against the backdrop of what could still turn out to be a nuclear catastrophe in one of the world's largest economies, traders are going to look east for some time yet."

Will the yen stay down? The big question now is whether the G7's action, the first co-ordinated move in foreign exchange markets in more than a decade, will lead to longer-term success.

As The Globe and Mail's Andy Hoffman and Kevin Carmichael report today, the move, which took many in the markets by surprise when it was announced last night, is aimed at currency traders who pushed the yen to a postwar high on expectations of massive repatriation of funds, threatening Japan's reconstruction efforts.

Some observers questioned the lasting impact as the G7 intervened this morning. The Bank of Canada was among those selling yen today.

"In the longer term it is difficult to imagine a scenario that would help the Bank of Japan weaken the yen on a more permanent basis, short of an end to the current U.S. policy of dollar devaluation, and some form of U.S. fiscal tightening," said CMC Markets analyst Michael Hewson.

"Given that Bernanke's most recent public comments with respect to monetary policy have continued to be fairly dovish, that doesn't seem likely, which leaves the printing presses as the other option for the Bank of Japan as they look to outfed the Fed."

Julian Jessop, the chief international economist at Capital Economics in London, believes the yen will "weaken substantially" in time, but that's because he fears the devastation in Japan will take a greater toll on the economy than expected, forcing the Bank of Japan to ease monetary conditions even more.

"In the meantime, the risk that the announcement of co-ordinated intervention (and the support it is providing to equities) could be a one-day wonder."

Currency strategist Camilla Sutton of Scotia Capital said the yen isn't likely to fall sharply over the longer term, but rather stabilize and slow its strength.

"In the near-term (excluding today) we think there is still significant pressure on [the U.S. dollar]to drift lower," Ms. Sutton said. "Turnover in [dollar-yen]is enormous at $570-billion per day and reversal in direction will require a significant capital commitment by authorities."

Adam Cole, the global chief of foreign exchange strategy at RBC in London, said he believes that the G7 objective was not to spark "significant" weakness in the yen, but to bring down the surge related to the devastation.

"Our view ... is that the balance of supply and demand is still [yen]positive and the natural direction for [the yen]is still up.

Encana joins terminal project Encana has agreed to buy a 30 per cent interest in Kitimat LNG, adding another vote of confidence to a $3.5-billion project that appears increasingly likely to be built, The Globe and Mail's Nathan VanderKlippe reports from Calgary today.

The company joins the Canadian subsidiaries of Apache Corp. and EOG Resources Inc. , which will now own roughly 40 per cent and 30 per cent of the project respectively. Terms of the deal were not disclosed.

If built, Kitimat LNG will be Canada's first natural gas export terminal, and for the first time allow western gas to flow to a foreign market other than the United States. Kitimat is a small British Columbia town located on the province's north coast.

China's boosts bank requirement China has yet again boosted the required reserve ratio, or RRR, for its banks by half a percentage point, its sixth such move since October. Are Beijing's attempt to cool inflation working?

"The People's Bank approach of using RRR hikes to restrain lending rather than, say, simply ordering banks to stick to quotas, or raising interest rates much faster, seems to be paying off," said Mark Williams, senior China economist at Capital Economics in London.

"Lending in February was well beneath the expected level, while recent evidence suggests that growth momentum in the economy has already peaked and that price pressures are easing."

Boyd Erman's Morning Meeting London Stock Exchange Group PLC, which is trying to combine with TMX Group Inc., has admitted it unfairly dismissed the head of a company it acquired, Streetwise columnist Boyd Erman reports today.

In Economy Lab today

While lost Libyan output appears to be priced into the oil markets, the days of $100-plus oil may be here to stay, Globe and Mail European correspondent Eric Reguly writes.

In Personal Finance today

Life is unpredictable, but if there's anything you can do to stave off disaster, it's to be prepared and be careful. Here are 10 steps you can take.

As markets react to crisis in Japan, investors who can keep their heads could benefit, writes financial adviser Ted Rechtshaffen.

The investing approach you take is up to you, but it's important to be consistent, Preet Banerjee says.

From today's Report on Business

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Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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