Competition between grocery stores will keep food prices modest in 2017: Report

Image:Tyler Anderson, National Post

TORONTO -- Fierce price competition between grocers will likely keep food prices from escalating significantly in 2017, according to a new analysis.

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With price-cutting moves from Walmart and Sobeys keeping other supermarket chains on guard, average food store inflation will not likely exceed 2 per cent in 2017, says a new industry report from Kevin Grier Market Analysis and Consulting Inc.

The main factors driving food price inflation in Canada are commodity prices and grocery retail competition, Grier notes, and currently grocery competition is “very intense,” with multiple grocers requesting price concessions from food manufacturers. “That indicates that the grocers want consumers to think they are fighting on their behalf. It also indicates that they expect to see a tight pricing environment for the foreseeable future.”

Challenges at Sobeys have led to sharp pricing and Walmart is continuing to push down its prices. “Even egg prices are down — they were down 7 per cent in November,” Grier added in an interview. “Eggs are supply managed, so that’s competition (pushing down the consumer prices).”

The forecast for modest inflation in 2017 comes after an inflationary spike in grocery store prices in 2015 and a negligible rise in 2016’s food prices.

Though the Statistics Canada data for December has not yet been released, based on Consumer Price Index increases for the first 11 months of the year, the prices of food purchased from stores will have increased at just over 1 per cent for all of 2016, Grier predicts. That compares with a 4 per cent increase in the prices of food purchased from stores in 2015.

The five-year average rate of food store inflation was 3 per cent between 2011 and 2015, Grier added, and 2016 will likely notch the second or third lowest rate of food price inflation since 2000, with 2010 standing as the lowest at 1 per cent.

Commodity prices are also tied to the strength of the Canadian dollar relative to the U.S. dollar. Prices of imported fruit and vegetables rise, for example, when the Canadian dollar is weak.

Bank of Montreal is forecasting a 2017 first-half exchange rate of 0.7345 and TD’s forecast is for a stronger Canadian dollar in the first half, at 0.7435.

If the BMO forecast ends up as the more accurate one, there will be greater inflationary pressure on commodities, Grier said.

“According to the Bank of Canada tracking of commodities pricing, the agricultural commodities are showing signs of life but remain at very low levels compared to recent years.”

While “anything can happen to commodity prices due to weather, currency or politics, at the very least they start 2017 at very low levels. In other words, if commodities are going to cause inflation in 2017, it would have to be due to events that have not yet unfolded, or are not yet at work.”

The analyst notes that cattle and hog inventories are on the rise and believes beef and pork pricing should remain low or lower in 2017 than in 2016. “Meats make up about one-fifth of the food CPI and so their (price) direction plays a big role” in overall food inflation.

“With the exception of the exchange rate, the main drivers of inflation remain very tepid,” with intense grocery retail competition expected in the first half of the year, Grier concludes. Though a weaker dollar could cause some commodities such as fresh produce to increase in price in the first half, “beyond that, it is likely that grocers and manufacturers will absorb the costing impact of the weaker dollar into tighter margins.”

Grier’s report contrasts a markedly higher forecast issued by Dalhousie University in early December, which predicted a 3 to 5 per cent increase in grocery prices in 2017.

That analysis looked in part at the potential impact of a Donald Trump presidency on Canadian food prices, and in particular how a higher U.S. dollar and a potential across-the-board increase in commodity prices could push up the prices of food commodities.

SOURCE Hollie Shaw, Financial Post