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Trevor Tombe: The federal food price plan makes no sense. Politically, that may not matter

Commentary

Families across Canada are struggling with high food prices.

On average, food costs 18 percent more in July this year compared to two years earlier. This is much faster than the usual 2 percent annual price growth. Indeed, it’s the most rapid acceleration in food price growth since the late 1970s. And for an average family, this adds roughly $150 per month in additional costs.

No wonder the government is under so much pressure to act.

Last week, the government finally announced a plan. If you can call it that.

As part of a broader package that primarily aimed to boost housing construction, the government also announced what it described as “concrete actions to stabilize food prices.” 

First, it will browbeat corporations by calling leaders of large grocery chains to “an immediate meeting in Ottawa.” Second, they will consider taxing grocery stores.

At first glance, this makes no sense. 

With a little more thought, it makes even less.

Taxing grocers will not ”restore the grocery price stability that Canadians expect,” as they claim. Neither will stern words.

But conveniently for the government, that may not matter. There are strong indications that food prices may stabilize soon regardless, allowing the government to claim victory.

Let us first examine the government’s main, if only implicit, claim: corporate greed and a lack of competition cause high food prices. 

Many agree. Corporations are an easy political target, after all. And the government’s NDP partners, for example, focus almost exclusively on this as the primary cause of inflation. 

I wrote at length on this for The Hub last year. The data is crystal clear: rising profit margins are not a particularly important cause of rising prices. Those conclusions remain as true today as they were then, and they are as true for food as they are for inflation overall.

Food and beverage retailers in Canada earned roughly 4.2 cents in profit per dollar sold in the second quarter of this year. Although up from 3.7 cents a year earlier, this is not a major factor in rising food prices. For perspective, this contributed 0.5 percentage points to the 9.1 percent food price increase between the second quarters of 2022 and 2023. That’s not zero. But it’s close.

Even over a longer period, changing markups account for little. Since early 2020, grocery prices have risen by 21 percent. Had markups not increased, they’d be up by 20 percent.

A key driver of grocery price changes is not corporate greed but farm product prices and input costs, including for producers elsewhere in the world.

There’s good news for consumers here: the cost of many important farm inputs has fallen recently. Machinery fuel is down nearly 27 percent since its peak last year, and fertilizer is down nearly 17 percent. This is already showing up in the price of many important farm products. The price of grains is down 8 percent so far this year, for example. 

Not everything is down, to be clear. Cattle and livestock prices are way up. But overall, farm products are nearly 11 percent cheaper compared to a year earlier. This may soon benefit consumers.

Historically, grocery price movements lag farm products by roughly six months. If this pattern continues—as it should—then we’ll soon see a sharp drop in grocery price growth. By December, average grocery prices could possibly even be lower than they were a year ago. 

The government will naturally claim credit. It was their harsh words and threat of a tax, they’ll almost surely say, that caused prices to stabilize. 

It’s hard to see this as anything but a cynical move to mislead Canadians, cast blame on a politically unpopular group, and claim credit for improvements that were beyond their control. 

That is bad enough. What was worse about the government’s plan was what it did not contain.

If politicians wanted to lower food prices, they would repeal policies that deliberately raise them.

Canada has several artificial and restrictive agricultural policies. We force farmers to hold costly licenses to produce milk, for example, and impose prohibitive tariffs of almost 300 percent on imports. Want a dairy cow in Alberta? The permit alone will run you roughly $50,000. The effect on prices of this policy—known as “supply management”—should be obvious.

Actual estimates are stark. Eliminating supply management for milk would cut prices nearly in half, according to the OECD. This adds up. One in every seven dollars spent on groceries by the typical Canadian family is spent on dairy products. If the policy of artificially raising these prices were repealed, we’d each save roughly $40 per month. Milk alone cost consumers $3.9 billion more in 2021, according to the OECD. Add $600 million for poultry and $300 million for eggs, and consumers pay nearly $5 billion more in total for groceries.

Support for policies that raise food prices is, to be clear, an all-party problem. Conservatives, Liberals, and the NDP dare not touch it. Dairy farmers have a powerful lobby. 

Scrapping this system would also come with costs, as we’d compensate farmers for the losses they suffer. But it would be better for those short-term transition costs to be borne by government than permanently by families simply buying milk. 

Until then, we’re stuck with a federal plan that falls apart under the slightest scrutiny. But politically—it pains me to say—that may not matter.

Livio Di Matteo: Canadians are miserable and politicians better start preparing for the blowback

Commentary

Canadians appear to be a particularly miserable lot these days if one is to take media reports at face value. The recent bout of inflation and interest rate increases appear to have brought about a particular phase of economic hardship that has spilled over into personal lives, and that hardship appears to be across the board in terms of demographic and income groups. As a result of financial struggles, inflation, and high interest rates are affecting Canadians’ mental health, according to one report fueling anxiety over housing and food.  

Millennials—particularly those who own a home—are apparently poised to face the most economic pain as interest rate costs steepen on strained debt loads and economic damage lays waste to the economy and expectations. Burdened by debt and rising housing costs, three-in-ten Canadians are “struggling” to get by, with the number of mortgage holders voicing difficulty meeting housing costs up 11 percent compared to last June. If you have someplace to live, you are hard-pressed to pay the bills, and if you do not have a place to live, then you are miserable because you cannot find one.   

With so much misery, it is surprising that the misery index has not been resurrected by assorted pundits as a measure of how miserable we all are. The misery index is an economic indicator first created by economist Arthur Okun during the 1970s which was an era of high inflation and high unemployment known as stagflation in the wake of the oil price shock and its macroeconomic impact. The misery index was constructed by adding up the rate of inflation with the unemployment rate with higher totals being associated with greater economic misery experienced on the part of the public. The index has also on occasion been expanded by including variables such as the bank lending rate. While not a perfect measure of economic welfare, it might nevertheless be useful to see if the current mood of economic angst and misery is captured by such an index.

Using data obtained from the Federal Reserve Economic Data (FRED) source of the St. Louis Federal Reserve Bank, the accompanying figure plots a monthly triple misery index consisting of the sum of Canada’s CPI inflation rate, its monthly unemployment rate, and the central bank rate for the period 1962 to 2023. Such a lengthy time span allows us to examine Canadian misery over time and it is quite an eye-opener. The 1960s were truly a golden age for the economy and were accompanied by some of the lowest values of misery in sixty years. Misery began to rise during the 1970s and appears to have peaked in the early 1980s, during which there was an unemployment rate that peaked at 13 percent, inflation that peaked at over 12 percent, and a bank rate that believe it or not hit over 20 percent one month making the current 5 percent seem like a monetary tea party.

Graphic credit: Janice Nelson.

After its early 1980s peak, misery declined with a major rebound in the early 1990s and then declined again, steadily bottoming out at values slightly lower than even the 1960s during 2017. Since 2017, they have risen, and based on the chart we are now at a point where we are at least as miserable as we were in the 1990s. Over the entire 1962 to 2023 period, this triple misery index has averaged a value of 16.8. As of June 2023, the Canadian misery value is 15—just a bit below the historical average.  

The most miserable month in Canada was August of 1981 when the value of the misery index hit 40.6. During that month, the unemployment rate was 7.2 percent, the bank rate was 20.9 percent, and inflation clocked in at 12.5 percent. The least miserable month in Canada was June of 2017 which came in at a value of 8. The unemployment rate was 6.2 percent, the bank rate was 1 percent, and the inflation rate was just over 1 percent.

The misery index charted here does show that misery has been growing since 2017 but it is currently below the historical average—and indeed it is still lower than the early to mid 1990s. It is definitely much lower than the period stretching from the mid-1970s to nearly 1990. And yet, if one talks to people and follows social or mainstream media, one seems to get the impression that things are much worse than the misery index would suggest. So, the question really is, why are Canadians feeling so miserable given that by historical standards, the misery index is nowhere near past historical peaks?  

This is indeed a perplexing and important question. One possibility is that the indicator is not fully capturing the misery of Canada today because there is more to misery than just the sum of the unemployment, interest, and inflation rates. Perhaps we should be including other economic variables, such as the growth rate of real per capita GDP, or perhaps a separate inflationary index for components such as rents and housing. This would suggest that the structure of misery is not as simple as it once was but, like the country as a whole, has become more complex and diverse and the misery index needs a major revamping.  

Another possibility is the old adage that in life and politics, timing is everything. While the recent surge in misery is modest by some previous historical episodes, it comes after a nearly 20-year period of low and declining misery. It also comes right after a global pandemic and several years of anxiety, change, and disruption that has left everyone more short-tempered and less tolerant than usual.  

It remains that the last twenty years have been marked by an era of low inflation, low interest rates and low unemployment, and numerous cohorts have come onto the labour market knowing only cheap money and never seeing recessions like that of 1981-82 or 1991. There may even be an issue of economic literacy at play here given that many are expecting relief from lower inflation rates and do not realize that a lower inflation rate means a slower growth in prices and not a return to price levels from a decade ago.

Or perhaps Canadians themselves have changed and have become less resilient in the face of adversity of any kind. After all, given the rhetoric, many came to feel that the pandemic was akin to a war and siege conditions. While the pandemic in Canada was indeed serious, it affected portions of the population differently. While some were on the front lines bearing the brunt of the pandemic—for example, health workers—others were not. Most wars involve widespread death and destruction of human life and physical and social infrastructure. They are generally not characterized by a situation where many can work from home, the government sends you enhanced transfer payments like the CERB, and you can order takeaway and watch Netflix.  

Whatever the reason, the reality is Canadians feel more anxious, miserable, and petulant than usual, and this will inevitably spill over into the political arena.