Strategy

The rising price of everything

Weathering the ever-increasing costs of food, fuel and clothing could prove tricky. So here's our handy survival guide to help.

On a recent Sunday afternoon, a steady stream of customers exit through the sliding doors of a Toronto-area Loblaws, rattling their grocery carts across the asphalt in the parking lot. Kathleen Matatya and Arik Ollo roll up beside their car, and unload about half a dozen bags into the trunk. Though in their mid-20s, when asked about the rising cost of food and fuel, they reminisce about bygone times with the hazy recollection of grandparents. “I remember buying [milk] at $1.50. Now it’s $4.50. But I have to feed him his cereal, so what can I do?” says Matatya, throwing a playful glance at Ollo. “I remember the days of 70? [per litre] gas,” he sighs. “Those were the good days.”

This kind of wistful remembrance is traditionally associated with the silver-haired among us, who pine for a simpler era when bread cost a nickel and milk a dime. But if the current climate is any indication, gone also are the days when it took a long memory to wax nostalgic about price. As the economy continues its rocky recovery, policy-makers are quick to point out that core inflation, the key measure upon which the Bank of Canada depends to set monetary policy and stave off destabilizing devaluations of currency, remains in check. But the price of food and energy — basic essentials, which, due to their volatility, core inflation doesn’t take into account — has begun what many see as a slow-but-steady march north. (In the past year, core inflation has gone up by 0.9%, while overall inflation has risen by 2.2%.) The result: a growing disconnect between official declaration and public perception. In the U.S., food costs in February saw the biggest monthly jump since 1974. (Though not as stark, Canadian food costs have also spiked in recent months.) In Canada, meanwhile, gas prices are up by 18% since October 2009. “[The banks] are trying to still the waters and let the dust settle a bit,” says Armine Yalnizyan, senior economist at the Canadian Centre for Policy Alternatives. But against the backdrop of slow average wage gains and record levels of household debt, she says, “it looks like the average Canadian is about to get into a pretty serious squeeze play.”

After months of higher input costs for manufacturers, the simultaneous spike in food and oil prices is a double whammy that is now starting to hit consumers. In the U.S., major clothing retailers like Levi Strauss & Co. have begun imposing selective price increases in response to soaring cotton costs. Likewise, Toronto-based baked-goods giant George Weston Ltd. recently announced an average price hike of 5%, following a 60% year-over-year jump in benchmark U.S. wheat prices. Other companies are opting for a more subtle solution: shrinking product sizes without changing the price. (Chris Morran, senior editor at Consumerist.com, says these grocery “shrink-ray’ tactics are becoming increasingly commonplace.) Meanwhile, with energy prices up by more than 13% since fall 2009, there is pain everywhere from home heating bills to the gas pump. And rising energy prices, of course, also mean higher input costs for all consumer goods. “We’re, at the moment, subjected to a situation sort of like the death of a thousand cuts, where many, many things are coming together to create a very difficult situation for consumers,” says Bruce Cran, president of the Consumers’ Association of Canada. Just how bad it will get remains to be seen. But for now, at least, Canadians had better get used to spending more on the stuff we’ve long taken for granted: the era of cheap food and fuel, it seems, is over.

In many ways, the current situation is merely a continuation of the supply problem that arose in the run-up to the recession. After decades of decline in the real price of commodities, by 2007, increasing demand from emerging economies kicked in in earnest. Seemingly overnight, China was moving from being a net exporter of corn to a net importer; its residents’ average meat consumption, meanwhile, had nearly tripled in less than 30 years. (A single unit of animal protein requires eight to 12 units of vegetable protein, making richer tastes much more commodity intensive.) At the same time, the ethanol push was gaining traction in North America, resulting in 40% of the corn in the U.S. being diverted out of the food supply. By mid-2008, it seemed like crisis was imminent. Some experts warned that oil would soon hit $200 a barrel, while food prices hit record highs, touching off riots around the world.

Though the financial crisis offered immediate relief from rising food and energy prices, it also helped lay the groundwork for a supply shortage in its wake. As Ron Lawson, managing director at the U.S.-based Logic Advisors, explains, without easy access to credit, agricultural producers were forced to cash in their assets to secure funds. “Across all spectrums of industry, you had a massive liquidation of inventory,” he says. As farmers sold off their stockpiles of grain and cotton, they also brought their livestock to market en masse, he says, leaving the lowest head count of cattle in the U.S. since 1950. As such, it’s likely no coincidence that in the past year, the market price for 100 pounds of Alberta steer has shot up from $80 to $104. Put simply, says Lawson: “We don’t have enough stuff because we got rid of it all.”

The coalescence of factors that are contributing to high food prices has often been described as a perfect storm — an apt choice of words, considering the extent to which bad weather has made an already-precarious situation even worse. Since droughts in Russia last summer laid waste to huge swaths of the world’s wheat supply, it’s been difficult to make it through a single week without catching at least a passing mention of extreme weather taking a bite out of our stocks of everything from cotton to tomatoes. But even more significant than the immediate effect of the droughts, floods and frosts (not to mention the unrest in oil-producing states like Libya) has been the reaction they touched off. According to Scotiabank’s Derek Holt, who predicts household grocery bills could balloon by as much as 15% in the next few years, the failure of the international community to settle on a rational policy for handling shortages has led to stockpiling and export bans, which “further impairs supply sides of markets and causes prices to go up even more.”

In the U.S., Lawson says high wheat prices have sparked a vicious cycle that is skewing farmers’ planting decisions, and driving prices on other crops higher, too. “Because wheat was so predominantly planted by everybody, it’s pushed corn acreage south.???But the price of corn is going to be high enough that people are going to want to plant corn, only that corn acreage is going to come in and infringe on the soybean,” he says, adding that increased Chinese demand for soybean oil will mean fewer acres for cotton — putting even more pressure on an industry that’s already feeling the pinch. In the past three months alone, Lawson’s firm, which specializes in commodities consulting, has advised 10 companies (including Levi’s) on how to weather the supply shock in a cotton market so volatile that they are no longer able to lock in price. “[They] literally cannot buy next year’s product because the guys [they] buy it from don’t know what the price is going to be,” he says.

None of which bodes well for consumers. Even if the bad weather breaks, and the crisis in Japan causes oil prices to drop, long-term forecasts show overall demand for consumer goods trending up, with no firm plan for expanding supplies in a significant, sustainable way. “What’s scary about this,” says Evan Fraser, Canada Research Chair in Global Human Security at the University of Guelph, “is that these underlying structural things are going to be what make these food systems more fragile.”

But how soon, and by how much, the current spike will hit our pocketbooks is anyone’s guess. For one thing, increases in commodity prices take time to trickle down to the consumer, and hikes depend largely on the willingness of retailers to absorb added costs. While Canadian consumers won’t likely be shielded from the knock-on effects of higher energy and cotton prices, the sticker price of groceries may not go up as quickly as one might think. Thanks to fierce competition on the food retail stage, says Kevin Grier, senior market analyst at the George Morris Centre, an agri-food think-tank based in Guelph, Ont., supermarkets may suffer pinched margins before imposing a significant price hike. And as with all consumer products, price-setting for food is also based on the behaviour of consumers, who often adjust buying habits in the face of markups. “If we back away, that could cause prices to go down and start to decline,” says Grier.

The impact of the inflation that appears to be underway will depend on one’s vantage point. From a producer’s perspective, Canada’s position as a net exporter means that spikes in food and energy will ultimately prove good for the overall economy. For consumers, though, the outlook is a bit more cloudy. As Fraser is quick to point out, Canadians spend a relatively small proportion of after-tax income — about 10% — on food. “Even a significant increase will only affect our household budgets by 1% or 2%,” he says. But for those at the lower end of the income distribution, so-called subtle hikes will no doubt feel like a wallop. “There’s an awful lot of people that lost tremendous ground in the course of the recession,” says Yalnizyan. “These cost increases are significant for them.”

For Ollo, the young man in the Loblaws parking lot, rising prices have simply become a fact of life. “It’s the same challenges that my parents faced, and their parents faced. It’s always the fight of the cost of living going up faster than wages, so what can you do?” he says. “You’ve got to adjust your lifestyle.”

Handy hints for inflation fighters

1. An obvious way to guard against sudden spikes in food prices is to stock up. “It may seen trite to say that more jams and pickles in the cold cellar will save us,” says the University of Guelph’s Evan Fraser. “But if a critical mass of people have three weeks of food, plus a month worth of supplies in their house, then the likelihood of a food price destabilizing a society is reduced.”

2. Buy food in bulk, and seek out no-name or house-brand products.

3. When planning your household budget, take climbing energy costs into account. As Joseph Doucet, Enbridge professor of energy policy at the University of Alberta, points out, though oil prices may go up and down on a weekly (or even daily) basis, “the long-term trend is rising.”

4. Do a cost-benefit analysis on your vehicles and major appliances. While it may not make economic sense to immediately trade in your new gas-guzzling SUV, there might be significant long-term savings in upgrading to an energy-efficient furnace.

5. Buy local. As energy costs increase, it will cost more to ship food across great distances, which will ultimately be reflected in the price on the grocery store shelf.

6. Take note of weather events. After a recent cold snap in Mexico destroyed 70% of the leading tomato-producing region’s crop, consumers felt the pinch almost immediately, as produce and other non-perishable items are particularly vulnerable to supply shocks. But if you know that weather is to blame for a spike in price, you can make an effort to steer clear of the affected product.

7. Drive less, take public transportation, and carpool whenever possible.

8. Go south. If possible, you might want to do a little comparison shopping in the U.S., where prices, particularly for fuel, are often lower than in Canada. “We’re all smart enough to look for the best deal and seek value, including going over the border if we have to,” says Bruce Cran, president of the Canadian Consumers’ Association.

9. Consider substitutions. While it may be difficult to avoid price hikes that stem from the rising cost of sugar and wheat, some products offer more wiggle room. For instance, if the price of beef spikes, you’ll save by opting for hamburger over steak.

10. Plant a vegetable garden. With transportation costs increasing and unpredictable weather events becoming more frequent, it never hurts to have access to your own supply. “It doesn’t have to be fancy,” says Ron Lawson, “but that’s one sure, solid way you can help.”