Food prices soared in September even as inflation slowed overall

Click to play video: 'Canadians feeling financial pinch of inflation'
Canadians feeling financial pinch of inflation
WATCH: Many Canadians feel the financial pinch of inflation hardest at the grocery store. – Oct 18, 2022

Food prices continued to soar across the country in September even as the annual rate of inflation cooled to 6.9 per cent, according to Statistics Canada.

Prices on food purchased from the grocery store continued to soar, rising 11.4 per cent to a new 41-year high.

Last month, shoppers paid more for meat (7.6 per cent), dairy (9.7 per cent), bakery goods (14.8 per cent) and fresh vegetables (11.8 per cent), according to StatsCan.

Prices on many grocery store staples soared in September, according to the latest inflation data from StatsCan.

The agency says food prices have outstretched the overall inflation rate for 10 consecutive months. It pointed to unfavourable weather, higher prices on inputs such as fertilizer and natural gas, and continued disruption from Russia’s invasion of Ukraine as driving up prices.

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Scotiabank vice-president and head of Capital Market Economics Derek Holt tells Global News that droughts affecting Europe and the United States are impacting Canadian food prices as well. The continued weakness of the Canadian dollar compared to the U.S. greenback will also raise the prices of food imported from south of the border, he adds.

Click to play video: 'Food price increases forcing some Canadians to make tough choices'
Food price increases forcing some Canadians to make tough choices

“So food, vegetable and fruit prices, I think are going to go up going forward,” Holt says.

StatCan said the drop in September’s headline inflation figure was largely thanks to lower gas prices. The pace of price growth at the pumps eased in every province except for British Columbia last month, StatCan said.

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CIBC Economics Managing Director Karyne Charbonneau said in a note to clients Wednesday morning that since gas prices have risen over recent weeks, October’s reading could show headline inflation “temporarily heading in the wrong direction again.”

Holt says gas prices are tracking gains of up to 10 per cent so far in October and that the short-term horizon for the oil and gas sector does not suggest an easing at the pumps any time soon.

“Going forward, I’m more concerned about the developments in energy markets over the next few months having to do with the war in Ukraine, the ongoing energy turmoil in Europe, and the fact that OPEC is starting to scale back its production,” he says.

Elsewhere, prices were up for durable goods such as furniture (13.3 per cent higher) and passenger vehicles (8.4 per cent higher).

Click to play video: 'Why used cars are actually increasing in value'
Why used cars are actually increasing in value

September’s inflation report also gives a glimpse at tuition prices paid by students. Tuition fees rose 2.3 per cent annually, up from 1.9 per cent a year earlier, according to StatCan. Fees rose the most in Alberta (up 7.7 per cent) and climbed 6.8 per cent in Newfoundland and Labrador after the end of a price freeze instituted in 1999.

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Average hourly wages were up 5.2 per cent in the month, failing to keep pace with price growth. But StatCan noted that the gap between inflation and wage growth was larger in September than in August.

Click to play video: 'Grocery hacks for food prices reaching four-decade highs'
Grocery hacks for food prices reaching four-decade highs

In August, Canada’s annual inflation rate slowed to 7.0 per cent.

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RBC had expected the annual inflation rate to come in at 6.7 per cent for September.

What does this mean for interest rates?

The latest CPI report comes one week ahead of the Bank of Canada’s next interest rate decision.

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The Bank of Canada’s policy rate currently sits at 3.25 per cent following five consecutive increases so far this year. Some of the key metrics the central bank watches to gauge its rate hikes, so-called “core inflation,” held steady from September to August.

“It is great that headline inflation took a small step in the right direction in September, but underlying inflation pressures in core measures showed no signs of cooling down,” said TD Bank Senior Economist Leslie Preston in a note.

She expects the Bank of Canada will increase its policy rate another 50 basis points on Oct. 26 and raise the policy rate to 4.0 per cent by the end of the year.

However, other banks are predicting an even higher rate hike next week given Wednesday’s inflation reading.

Holt tells Global News he expects an increase of “at least” three-quarters of a percentage point next week and he the bank to “probably repeat the line about how interest rates will have to continue to rise further going forward.”

CIBC now expects an interest rate hike of 75 basis points next week and a possible quarter-percentage-point hike to end the year in December.

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“The Bank of Canada has clearly not slayed the inflation dragon yet and is therefore set for another large rate hike next week,” Charbonneau said.

Click to play video: 'Bank of Canada Governor Tiff Macklem speaks on inflation, rising interest rates'
Bank of Canada Governor Tiff Macklem speaks on inflation, rising interest rates


Meanwhile, BMO Chief Economist Doug Porter agrees the Bank of Canada will have to raise rates more than previously expected.

He said in a note Wednesday that the central bank’s recent “tough rhetoric,” combined with a weak Canadian dollar and the possibility of a 75-basis-point hike from the U.S. Federal Reserve in November, will push policymakers to increase the benchmark rate by three-quarters of a percentage point on Oct. 26.

BMO has another 25-basis-point hike “pencilled” in for December, he said, which would see the central bank’s key rate end 2022 at 4.25 per cent — four percentage points higher than where it began the year.

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Money markets bets also swung to a 75-basis-point move after the inflation data, according to Reuters, with the policy rate now seen peaking between 4.25 per cent and 4.5 per cent early next year.

How much more will your mortgage cost?

StatCan says Canadians are paying more for renewing or taking out new mortgages as of late, with the mortgage interest cost index rising 8.3 per cent in September.

This is tied to the Bank of Canada’s benchmark interest rate, which sets borrowing rates for other Canadian banks and affect mortgage rates for homeowners.

Variable-rate mortgages, for example, see their rates immediately rise or fall in step with the central bank rate hikes.

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James Laird, co-CEO of comparator site, said in a release Wednesday that these mortgage holders are likely to be “fatigued by the endless oversized rate hikes” this year.

Variable mortgage holders could be tempted to lock into a fixed rate after next week’s rate decision, he said, as most lenders will be offering five-year fixed-rate mortgages on par with variable options if the bank raises rates by half a percentage point.

Breaking down the increase, Ratehub calculates that a homeowner with a five-year variable rate of 4.25 per cent today on a mortgage of $593,856 currently pays $3,205 per month.

Click to play video: 'Your Money: Tips for managing monthly mortgage payments due to rising interest hikes.'
Your Money: Tips for managing monthly mortgage payments due to rising interest hikes.

A 50-basis-point increase next week would raise that mortgage rate to 4.75 per cent, an increase of $165 more per month or $1,980 per year.

If the Bank of Canada goes for a 75-basis-point increase, that same homeowner would pay $249 more per month or $2,988 per year.

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“Anyone with less flexibility in their household budget should consider locking into a fixed rate. Anyone with flexible household finances might hang on to their variable-rate mortgage in anticipation of future declining rates that may be needed to stimulate the economy if we end up in a recession,” Laird said.

How are politicians responding to inflation?

Politicians sparred in the House of Commons on Wednesday over the rising cost of living, with Conservatives and Liberals accusing each other of failing to support Canadians through rampant inflation.

Conservative leader Pierre Poilievre said that rising costs on bread and other grains could be mitigated if the Liberals dropped the carbon tax and made domestic production easier for Canada’s farmers.

He cited Bank of Canada Governor Tiff Macklem’s recent speech, in which the central bank chief said inflationary pressures are increasingly domestically driven.

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“This is homegrown Liberal inflation,” Poilievre said.

In his Oct. 6 speech to the Halifax Chamber of Commerce, Macklem differentiated between the early global causes of inflation and the domestic sources putting pressure on prices, such as growing demand for services like travel and recreation.

Prime Minister Justin Trudeau fired back at Poilievre, accusing the Conservatives of not supporting legislation in the House to provide dental care to young Canadians and a $500 direct support cheque for the most vulnerable renters.

He said that 11 million households will also benefit from a doubling of the GST credit, a Liberal measure that was sworn into law on Tuesday.

“This is money that can make a huge difference in Canadians lives,” Trudeau said.

Poilievre countered that Liberal measures will do “nothing for the vast majority of struggling families,” and that those who do receive support will see it “gobbled up by increased inflation.”

Speaking to reporters earlier in the day, Deputy Prime Minister Chrystia Freeland said that the government’s support for Canadians must be limited, or it could end up pushing inflation higher.

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“The fact is that the government simply cannot compensate every single Canadian for every single additional cost imposed by elevated global inflation,” she said.

“If we were to try to do that, we would be pouring fuel on the inflationary flames, we would just be making the Bank of Canada’s job harder and ensuring that inflation lasted longer and that rates went up even higher.”

Freeland said the government will unveil its fiscal projections in the fall economic update, a date for which should be announced “in the days to come.”

— With files from Global News’s Kyle Benning, Reuters, the Canadian Press

Click to play video: 'Freeland says Canadian, world economies heading toward slowdown'
Freeland says Canadian, world economies heading toward slowdown

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