Canadian Consumer Prices Could See Unexpected Jumps Soon: National Bank

This year’s holiday sales may not be as impressive as previous years and Canadians may find the cost of food on the rise this winter, an economist at one of Canada’s major financial institutions has warned.

Canada’s central bank on Wednesday reiterated that it expects inflation to remain low in the months and even years ahead. 

But Stefane Marion, chief economist at National Bank Financial Markets, believes policymakers are underestimating the potential for rising prices because they’re missing a key piece of the puzzle: Consumers are shifting their spending from services to goods, and according to trade data Marion cited in a report this week the demand for goods is about to outstrip the supply.

Watch: Investors should be worried about inflation getting untethered, Research Affiliates CIO says. Story continues below.

Despite the mass layoffs earlier this year, “households continue to take advantage of various income assistance programs, and shift their spending from services to goods,” Marion wrote. “Demand is currently so strong that production is not keeping up with consumption.”

That will mean rising prices for manufactured goods, probably within the next several months. The price hikes will affect products of all kinds including food, particularly processed foods, Marion predicted. 

“I’m not sure you’ll see that many good deals for the holidays this year,” he told HuffPost Canada.

The Bank of Canada (BoC) announced Wednesday that it is keeping its key lending rate at a rock-bottom 0.25 per cent, and signalled again that it plans to keep that rate low for the foreseeable future. Its policy is based on the rationale that, with unemployment high and many businesses idle, there won’t be much inflation.

But if inflation does happen, the big unknown is whether central banks like the BoC will respond by raising interest rates in the middle of a pandemic, as they would in normal times. Higher interest rates could push some households and businesses into bankruptcy, and worsen governments’ financial shape. 

“There’s no historical precedent for a recession triggered by a pandemic in an environment where the global supply chain was so integrated,” Marion said.