By Sylvain Charlebois on May 27, 2020
The food sector has never been recession-proof. But COVID-19 may show us that it’s immune to deflationary pressures
Despite a negative inflation rate overall, recent Statistics Canada numbers tell us we’re in for a wild ride at the grocery store.
While the general inflation rate sits at -0.2 per cent, the food inflation rate is at 3.4 per cent. In December, Canada’s Food Price Report predicted a food inflation rate of about 4.0 per cent for 2020, and this is very much where we’re headed.
COVID-19’s economic shock will likely affect grocery shoppers’ pocketbooks for quite some time.
Inflation hasn’t been an issue in Canada for a decade. It came close to 4.0 per cent in 2011 and that’s about it. Not much excitement there.
And we’ve seen some decoupling between the general inflation and food inflation before, but nothing like this. Food prices are increasing almost four times more rapidly than the price of any other durable goods in the economy.
The consumer price index doesn’t reflect the actual costs households face due to lockdowns. We are all consuming differently. Still, the difference between general inflation and food inflation is huge.
In March, the initial shockwave impacted food industry and the rest of the economy directly.
Food service, a sector that generates more than $90 billion in revenues a year in Canada, essentially disappeared almost overnight. Lockdowns forced the entire food industry to adjust quickly to a change in our economy.
That shock was swiftly moved to the demand side, as households were hit by layoffs and lower incomes.
Financial markets were then hit hard by the uncertainty of when the pandemic and lockdowns would end. This was unlike other textbook recessions, where a slowdown is triggered by a shift in demand, which leads to market pressures to cut supply.
COVID-19 is essentially a one-two punch to the system: both sides of the economy – supply and demand – were hit hard. There’s no textbook for that.
The recovery’s sequence is hard to predict, with more than eight million Canadians having applied for the Canadian Emergency Recovery Benefit (CERB).
Once confinement measures loosen up and Canadians can go out, shop, visit restaurants and do other normal activities to support the economy, will they?
If lingering fears prevail over existing contagion and a second wave, with continued uncertainty about household incomes, the likely outcome is deflation or at least a price drop for most things.
‘Deflation’ is likely the scariest word for economists. It’s like cancer to an economy.
It’s hard to end deflation and grow an economy when consumers know that what they want to buy today will be cheaper tomorrow. That could impact clothing, cars, houses – you name it. But taxes will go up, putting more pressure on consumer demand.
So economically, let’s hope Canadians do their part when allowed.
But food will likely buck the deflationary trend for an extended period.
Unlike what analysts often say, the food sector is not recession-proof. Consumers either trade down or don’t go out as much when faced with higher prices.
And with COVID-19, nobody has been going out to restaurants, and we haven’t really celebrated the lockdown over caviar. Most of us have gone back to basics, cooking and baking. Consumer demand now has a COVID-19 benchmark: general deflation or not, we need to eat.
Yet on the supply side, COVID-19 is making all goods more expensive to produce, process, distribute, retail – everything. It all costs more: new cleaning protocols, higher salaries and building infrastructure for e-commerce to accommodate consumers who no longer want to physically grocery shop.
Plant shutdowns and food safety issues are the last things the food industry needs.
With online shopping becoming more popular, delivery costs also must be covered by consumers, whether we like it or not.
Food has always been a high-volume, low-margin business and that’s not going to change. For the industry, covering the cost to produce and distribute food, and asking consumers to pay more won’t change either. COVID-19 is impacting the entire planet, so we can’t import our way out of this scenario either.
So we could see the average Canadian family devote a much greater percentage of their budget on food. Pre-COVID-19, roughly nine per cent of our household budget was devoted to food. It’s one of the lowest percentages in the world. That could rise to 11 or 12 per cent by 2022. In fact, given the lockdowns, that percentage is likely much higher right now.
In comparison, Americans typically spent six or seven per cent of their household budget on food, and Europeans spent about 15 per cent before the pandemic. Their percentages will likely change as well.
In 1970, Canadian households spent 21 per cent of their budgets on food. So in a sense, we’re going back in time.
Current economics are overwhelmingly forcing us to revisit the social contract we have with food, perhaps for the betterment of society. Valuing food has positive socio-economic implications. The circumstances have made us more attuned to the food sector and made us more food literate.
Such shifts in food prices are relative to what else is going on in the economy and will leave many behind – food insecurity levels in many parts of our country will soar. Single parents, children and underprivileged groups will require more attention as we head into into a new food era.
However, there is a silver lining. Since March, even if food prices have been rising, most households are spending less on food. Each household in Canada is saving approximately $5 a day by cooking at home and avoiding restaurants. That’s a savings of more than $345 since the beginning of the pandemic, far exceeding the price hikes shoppers have needed to absorb during the same period.
Any way we look at it, COVID-19 will have a long-lasting impact on our relationship with food – and no one is immune to that.
Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.