Rising prices at the grocery store—it’s complicated

The surging inflation that has hammered Canadian consumers and businesses over the last 18 months or so is waning. In March, the year-over-year increase in the Consumer Price Index (CPI), which measures the change in prices for consumer goods and services, was 4.3 per cent, the slowest pace since last August and down from an average of 6.8 per cent in 2022. Gasoline prices were 14 per cent lower than a year earlier.

But what about food?

Food represents a sizable portion of the total CPI—roughly 16 per cent, which is divided into two categories: 1) items purchased from grocery stores and other specialty outlets, accounting for three-quarters of the consumption food basket; and 2) food eaten at restaurants, which comprises the rest.

In March, food prices were 9 per cent higher than a year earlier, more than double the total CPI inflation rate. Year-over-year inflation is still running at close to double-digits for some products that regularly find their way into shoppers’ grocery carts.

Consumers, understandably, are alarmed. A recent CTV News story reported that one in three Canadians believe grocery stores are “price gouging.” Federal politicians have responded. Parliament recently summoned top executives from several leading grocery chains to Ottawa to explain the jump in food prices since mid-2021.

In dollar terms, grocery chain profits have increased in tandem with higher food prices. But the margins grocers earn—that is, the difference between the prices consumers see and the wholesale prices grocers pay for the stock on their shelves—do not appear to have changed significantly. Grocery has long been a low-margin, high-volume business. It remains so today.

The profits of grocery chains are higher mainly because food prices have risen. But that doesn’t mean grocers are enjoying higher margins on most of the items on their shelves.

Late last year, Statistics Canada produced a study on the causes of higher food prices. It pinpointed the following as the main drivers of food price inflation over the 2020-22 period: COVID-19 disruptions that affected many agricultural supply chains in 2020-21; Russia’s invasion of Ukraine in 2022, which impacted the supply and prices of grains, fertilizers and some other food-related products; extreme weather patterns including extended droughts in some agricultural producing jurisdictions (including Brazil and California) and severe flooding in other areas; increases in energy and other “input” costs paid by farmers, food processors and freight-hauling businesses; rising labour costs along the food supply chain including in the grocery business itself; and higher property, payroll and energy taxes facing grocery stores and other retail businesses in Canada.

Currency movements also matter, particularly for Canada as we import many food products. The weakness of the Canadian dollar against the U.S. greenback in the last two years has contributed to higher food prices, notably for fresh and frozen fruits, nuts, some types of vegetables, and canned goods.

Economists see food prices continuing to climb in 2023, but more slowly than last year. Lower energy and commodity prices, and further improvements in gummed-up global supply chains, should help dampen cost pressures that have been hitting farmers, food processors and the freight transportation sector. For 2023 as a whole, food price inflation may come in closer to 5 to 6 per cent, less than in 2022 but still higher than Canada’s average projected inflation rate.