From inflation to interest rates to grocery prices to … profiteering?

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Jordan Heath-Rawlings So it was another lovely, optimistic day for those who worry about the next year or so of Canada’s aggressive economy. The bank of Canada has hiked its key interest rates by 50 basis points to 3.75%. Today’s hike makes it the 6th consecutive increase in an effort to fight inflation, which was recorded at a shade below 7% last month. Yes, interest rates have been raised again, supposedly to fight ongoing inflation. But guess what? This is the 6th time this year they’ve been raised and inflation is still high. And now so are interest rates. I’m not trying to be glib, this is just what’s happening. It’s the reality Canadians are grappling with. Now haul out your last grocery bill, take a look at what you bought and how much you paid for it, and let me know how much good having those prices frozen for a few months will do for you. Following the path of several grocers around the world, loblaws is the first in Canada to voluntarily freeze prices on its privately labelled products. Right after Loblaws announced their price freeze, metro announced a shockingly similar one. And of course, it didn’t take long before the federal government, already keenly aware of how the public feels about big grocery chains right now, took notice of that. Canada’s competition bureau will be looking at the groceries market to see if more competition could help bring prices down. So this is all kind of a mess. Meanwhile, interest rates are up, inflation is still high, the bank of Canada is warning of a recession, our money is buying less everywhere, and most Canadians are standing here wondering what the heck they can expect from all this over the next year. So today we’ll discuss how all these things work together and how maybe, just maybe, they might work better. I’m Jordan Heath-Rawlings. This is The Big Story. Jim Stanford is an economist. He is the director of the Centre for Future Work and he is occasionally a contributing columnist in the Toronto Star. Hi, Jim.

Jim Stanford Good morning, Jordan.

Jordan I’m glad to be talking to you right now because yesterday the Bank of Canada raised its interest rate by half a point. Which brings it to what exactly? And what is the bank telling us with this continuing interest rate hike?

Jim Stanford Right, this was the 6th interest rate increase from the bank of Canada since March when they started this crusade. It takes their overnight lending rate to 3.75% and it started at 0.25%. So that’s a heck of a change. That’s about a 15 fold increase. Now, that overnight rate, of course, Jordan, is not what you and I pay on our car loan, or our credit cards, or a mortgage. That’s what the bank of Canada charges the banks for keeping money at the central bank. We pay much higher than that. And we’ve seen a tripling of the interest rate on variable mortgages and big increases across the board. They say that they’re doing this to get inflation back from where it is right now, around 7% to its 2% target. So far, the interest rate increases have actually increased inflation. I know that sounds perverse, but because of the impact on housing costs, the debt charges that are built into a mortgage and also rents, rents have gone way up with higher interest rates. They’re actually making it worse, not better. In the near term. Down the road, it’s probably going to cause a recession. And inflation usually falls during a recession. Whether that’s a good trade off or not is another matter.

Jordan When we talk about inflation, and this is what I want to get into today, we often talk about it as just one number that encompasses everything. Is that what we’ve seen over the past few months, the price of everything going up, or have something sort of outpaced that and other things perhaps not increased by as much?

Jim Stanford No. Certainly the Statistics Canada people, when they’re calculating the Consumer Price Index, the CPI, they measure the prices of thousands of different goods and services. And of course, the prices change for each of those things at different rates. There’s still a few things out there that are falling in price. Some of the new versions of different electronics, some of those prices are still falling, but most everything else is increasing at different rates. And then the overall rate that we see at six 9% at present, that’s a weighted average of all of the different things. Now, the start to this whole problem, you know, a year and a bit ago, when inflation first started rearing, its ugly head was clearly the result of international factors. So we had the energy price shock, of course, the thanks in part to the war in Ukraine, we had global supply chain problems, huge increase in global shipping costs. These were all mostly kind of a hangover from the pandemic, from the closures and then the reopening after the pandemic. So initially you could isolate where the inflation was coming from and it was mostly from those global factors. Now, of course, because Canadians, whether you’re business or a worker, they’re all trying to protect themselves against inflation. And so we’re seeing adjustments in prices in all kinds of things, including things that are just produced here in Canada. So the inflation has definitely spread and broadened. And this is one of the reasons the bank of Canada says we’re intent on slowing down the whole economy to get it under control.

Jordan I’m glad you touched on where the inflation pressures are coming from because that’s what we really wanted to talk to you about today.

Jim Stanford And I thank you for the intro about the recent breaking news on the interest rates. It’s hard to keep up these days, Jordan, I tell you.

Jordan I know it was fortuitous, though, that we had you on the show today to introduce it that way. But what we’re really discussing today is probably, I would guess, where Canadians feel the pinch of inflation the most from day to day, and that’s with groceries. But because you touched on where that comes from. I know this is a difficult question to answer, but when we look at something like the price of groceries continuing to climb, is there any way for us to tell how much of that are the international factors? You mentioned? Shipping, fuel, all that stuff and how much of it, and this is delicate is major companies hiking prices to make larger profits? Right?

Jim Stanford Well, you’re quite right to identify that there’s a range of different factors causing food prices to grow. And you’re quite right to say food prices are certainly one of the most infuriating dimensions of inflation that we’re experiencing, not necessarily the biggest single source. Frankly, up there in the top three, gasoline prices have been the biggest single contributor to inflation. Housing costs very, very important. But groceries are right up there. Grocery prices have grown by an average of 11.4% over the last year. Ouch. And Canadians have to face up to it every week when they go to Loblaws or Sobeys or wherever they shop at a mixture of forces. There again, the international shipping costs and supply disruptions. You’ve seen a huge number of natural disasters, most of them related to climate, floods and droughts and other things like that, that have affected supply of different agricultural commodities. The war in Ukraine, again, part of it partly because of the impact on energy prices, partly because of disruptions in the things that are made over there wheat, sunflower seeds and oils, etc. And within Canada, you’ve got inflation and cost pressures all along the supply chain, you know, from the farmers who are struggling to the food processors. But there’s no denying Jordan, a big kind of slice of the cheese. On top of it all is the profits of the supermarket chains. They have really grown strongly since the Pandemic, up over 100%, frankly, compared to 2019, the last normal year we had before collgate. And so the supermarkets are certainly passing on higher costs, and then some supermarket profits have grown, and that is part of what we’re paying those prices for.

Jordan You wrote about this in a column for the Star last week. But tell me about what Loblaws did to try to get ahead of that narrative that you just mentioned, that grocers are hiking their prices in order to take more profits, and not just because of its factors outside our control.

Jim Stanford Well, the supermarkets have been in the public eye for some time. Frankly, I think it is partly because people go there every week and it’s kind of like picking at a scab or something. Jordan every week you go and you say, oh, no, how can it be that much now? And you actually ask, why are the supermarkets charging this much for something that used to be 30% cheaper and then that has political ramifications. So, you know, our governments get calls from angry consumers and the opposition parties do. So you’ve had a debate over how supermarkets have responded to the pandemic, frankly, for a couple of years now, but it’s gotten hotter. And we had first the NDP passed a motion in the Agriculture Committee at the House of Commons, then you had the overall House of Commons passed a motion to investigate supermarket pricing practices and profits. And now you’ve had the Competition Bureau, the Federal Competition Bureau say we’re going to have an investigation as well. So the supermarkets know that people are angry and that they’re being watched carefully. So I think in an effort, a public relations effort and a bit of a lobbying effort to try and short circuit that anger, Loblaws said, we will freeze the prices on our noname brands. Those are the yellow packaged, lower cost items that they sell in house for a period of about three months until February after the Christmas holiday season and sort of pretended that they’re doing this as a favor to consumers to help them. And of course, nobody believes they do anything as a favour to consumers. It’s a strategic effort regarding their public image and perhaps also internal marketing. Even though those products are priced cheaper than the national brands, the profit margin that Loblaws makes on them is higher because of the fact that it’s their own brand and they pay lower costs to their suppliers and they kind of cut out the national brand as the intermediary there. So it’s actually a lucrative line of business and it could be an attempt to actually shift demand away from the national brands to their own products more than an act of charity for Canadian consumers.

Jordan So they announced that and what did their competitors do right after?

Jim Stanford Well, this is what you call the law of unintended consequences, Jordan. You try and do something, you think it’s going to have a good effect, and then lo and behold, it does something you weren’t expecting, and this happened here. So Law Blogs announces that they’re going to freeze prices on their noname brands at the current elevated levels, I might point out, right, it’s one thing to freeze them when they’re low, it’s another thing to freeze them when they’re high and immediately. First of all, that confirmed that the supermarket has strategic pricing power and it ran against the narrative that Law Blaze itself had been communicating for months before, namely, oh, don’t blame us, we just have to pass on higher costs that we get from our suppliers. Well, that argument is as true of no name products as anything else. Law Blogs doesn’t manufacture the toilet paper and the butter and the other stuff that comes in yellow packages. So they first of all proved that companies can show leeway and strategy in their pricing decisions. But then even worse, within hours, one of their big competitors, Metro, that’s another one of the big three chains la Blais, Sobies and Metro really have a lock on the overall supermarket business in Canada. It’s very concentrated. Metro came out and said we’ve frozen the prices for our noname brands as well. It’s not called no name, it’s the house brand. By the way, they said this is a normal seasonal practice. Typically over the Christmas break, you don’t implement big price changes. So all that did was confirm Jordan what we already knew, namely this industry is a cozy oligopoly. The three dominant competitors have the power to influence prices and what’s more, they watch each other and match each other. Whether it’s explicit collusion, as was shown to be the case in the bread pricing scandal a few years ago, or whether it’s just kind of an implicit pact among them, they behave similarly and that keeps prices elevated for consumers. It also keeps prices suppressed for suppliers. And this is an interesting angle. It keeps wages suppressed for the workers at grocery stores because they’ve got this power. We saw that after the initial COVID lockdowns, you’ll remember the supermarkets were paying a $2 an hour bonus to workers to get them to come to work. And that was before vaccines and everything. Remember people were worried they could die if they caught COVID. Well, of course you still have to worry about that, but back then it was very frightening. And so to get people to come to work, they pay $2 an hour extra so that we could get groceries. They really were heroes, those grocery store clerks. But then at the moment they decided they didn’t have to anymore. All three of the chains cut the wage by $2 in the same week. Another example of the sort of implicit collusion that goes on there. So Loblaw’s action in a way, reaffirmed how this industry works and it does not work for the benefit of consumers. No doubts.

Jordan So from the point of view of an economist looking at this big three that control almost the entire market was freezing the prices, did anything positive come out of that? The way you describe it, it hasn’t even worked as a PR move. Right?

Jim Stanford Well, I mean, I will tell you, they got a heck of a lot of free advertising out of it from the media covering this sort of novel response. So they might still think it was a good idea. I’m not sure. I don’t think anything significant will come out of it from consumers point of view. I don’t think you’ll notice any difference on your overall shopping bill. Loblaws could have frozen prices for everything in its store. The logic is no different for all of the other things on its shelves. So the fact that they chose this particular name brand inhouse brand is strategic in their regard. So as a measure of reducing the pain that consumers feel. This is going to have no measurable impact, and now we’re going to see those investigations kind of proceed over the next weeks and months. So the supermarkets are going to be in the public eye for some time to come in and rightly so. They’re absolutely part of the problem. They’re not the only reason inflation is taken off. We had a cozy oligopoly in supermarkets before, COVID So clearly the spur for what we’re seeing came from the lockdowns, the international disruptions and everything else that happened. But the supermarkets are making it worse with their own profit taking. And frankly, that’s something that we see in other sectors of the economy as well. Energy, housing, wood products and building materials is another area where inflation has definitely been caused by enormous profit taking. This is important to look at the supermarkets and it should be the start of a broader conversation. We’re at a time of uncertainty and crisis in our health, in our society and in our economy. And in the middle of it you’ve got large, powerful companies saying, this is a good chance to jack up prices. I’m going to do that. And I’m not sure we should take their power and their sort of moral right to do that for granted. When we talk about the profit margins for these companies, to the average person, these grocers say their profit margins are three-4%. Yes, that seems low.

Jordan Is it low? What is normal for this kind of sector? And how should people look at that when they hear that, well, look, we’re barely making any money, of course we have to jack prices, right?

Jim Stanford Yeah, I’ve heard that profit margin argument a hundred times and it’s very dubious. First of all, this idea of a low margin makes it sound like supermarkets is a skin of the teeth operation, barely on the edge of survival. And that’s nonsense. The sales margin is a measure of how much profit you make relative to the total volume of sales that go through your operation. And so it all depends on what you’re measuring it against. So the fact is, a supermarket, most of their costs are what they pay the suppliers for all the stuff they put on the shelves, but it’s basically a pipeline that comes in and it goes out. So the end profit is really more determined by the real operations of the supermarket, the building, the real estate, the labor costs, the utilities, etc. And relative to those costs, the profit margin is very healthy. Relative to the amount of capital that has been invested in the business, it’s very healthy. Loblaws return on equity is actually a more appropriate measure of the profitability of the business. Here 15.6% in the first half of this year, and that’s a very healthy rate of return. So here’s a good analogy, Jordan. Think about a real estate agent, okay? They take a margin typically the real estate agents get 5% commission and then they split it. So a typical real estate agent would get two and a half percent. That’s about what Loblaws claims as profit margin is. Now, if the price of a house is $1 million, the real estate agent gets two and a half percent. If the price doubles to $2 million, which is kind of what we’ve seen. The real estate agent is still just taking two and a half percent, but their total profits have doubled. And that’s the kind of thing that we’re seeing, this idea that it’s a low margin business and nothing has changed. Absolutely wrong. They are profiting from inflation, clearly, because it’s only inflation. It’s not that we’re buying more groceries. In fact, Canadians are buying less groceries because they’re so darn expensive. So the only thing driving up the overall sales number is inflation, and they’re taking a nice chunk of it. So there’s no doubt that they have profited from this moment and in a way, have contributed to this moment.

Jordan Thank you for explaining that. That’s something that I hadn’t understood. The last thing I want to discuss is the investigations, specifically the Competition Bureau. One, what does a Competition Bureau investigation actually mean for the big three grocers? Like, how does it work? What should they be watching for?

Jim Stanford Right, well, in a way that isn’t entirely clear, and I’m going to be watching it. And I’m not a competition law expert, I’ll be frank, I’m a macroeconomist and a labor market economist. But I know enough about numbers to be able to dig into some of the supermarket financial statements and see, oh yeah, they’re definitely making money. How the competition bureau will handle this. They will obviously do some investigation of their own into the financial statements and other sources of data, statistics Canada data. They will conduct interviews with the companies involved and perhaps with consumer groups and other interested stakeholders. And they’ll be looking at whether in particular, whether any laws have been violated in the course of this laws regarding collusive behaviour. I think the key problem here is Jordan, that our laws are not really strong. You really have to be caught with a smoking gun in order for the competition Bureau to do anything. And the bread price fixing scandal of a few years ago was a rare example of that. Right. So I think that I suspect not much is going to come out of the Competition Bureau’s investigation other than some more public heat on the supermarkets. I do think that part of the takeaway from the current inflation that we’re experiencing should be a willingness to look at our competition laws further in Canada and think about ways of providing more leeway for government action or competition Bureau action to prevent those sort of practices. Those collusive practices, even implicit ones, have stronger penalties when they are found to have heard and even take measures like breaking up super large companies, if their role, if their dominance of a market is too great. You know, that has been an approach of competition policy in the past, but we don’t seem to do that anymore. We seem to tolerate large companies, whether it’s supermarkets or telecom companies or banks, using their market power to make undue profits. And I think that in reaction to the current inflation that we’re seeing and the concerns about corporate concentration, we should be having another look at competition law in order to see if there’s other ways to hold these big companies to account.

Jordan Last question, then what do you expect to see or what will you be specifically looking for over the next several months? We just had one interest rate hike. Will we have more in terms of inflation? That covers everything. Is it going to get worse before it gets better? What’s out there to watch right now that could tell us where we’re headed?

Jim Stanford Jordan they say that economics is the dismal science. And I tell you, we’re living up to that reputation big time these days. I am very pessimistic about what’s going to happen in the next six months, in the next year, even the next two years, frankly. So this bank of Canada increase was the 6th since March, and they have said quite clearly there are more to come, even though they acknowledge that there’s a huge risk of recession. In essence, the bank of Canada said yesterday that there was a 50 50 chance of recession. I would put the odds more at 90 ten, frankly. But it’s amazing to have the central bank acknowledged that a recession is quite possible, yet we’re still going to increase interest rates. And they are. So it is definitely going to get worse before it gets better. Inflation has not responded yet to those high interest rates, not at all. Some of the international factors that caused inflation in the first place are resolving and dissipating a bit, which is a good thing. And frankly, that would have happened even without the interest rate increases. But I think we are going to be in recession next year. Canadians, hundreds of thousands of them, are going to lose their jobs. Hundreds of thousands of them are going to lose their homes. And it’s going to just be another layer of misery on top of what we’ve been through in the last three years. And the thing that absolutely infuriates me is we don’t have to do it this way. This is going to be a man made recession. It’s going to be a completely engineered, self inflicted wound. And in that regard, I think we have to have a big discussion about how do we think about inflation in the economy? How do we manage it? Do we take it for granted that huge companies like Loblaws have the moral and legal right to charge what the market will bear even during a moment of great social disruption? Because that’s where inflation came from. And in that context, I think there’s tough times ahead. But maybe it will spur us to have another look at how we manage this important aspect of our economy. At the risk of opening up one whole other can of worms, you say we don’t have to do it this way, how could we do it right? Well, our center for Future Work published a big report just a week ago on a six point strategy for dealing with inflation other than throw the whole economy into a recession. That’s our recipe book right now, and there’s only one page in it. Use the interest rate to slow down overall growth, increase unemployment, and then assume that inflation will come down. So we said, first of all, it has to be a more multidimensional strategy. That’s where our six points came from. It’s not just a bank of Canada that should be charged with managing inflation. The government has an active role to play. Fiscal policy can be effective as well as monetary policy. The government should be addressing the root causes of the inflation that we’ve seen. The housing bubble, for example, absolutely dominant in this. So let’s get more affordable housing built. The energy price spike also a huge part of it. So let’s make sure we’re rolling out those renewable and sustainable energy sources that have nothing to do with OPEC and world oil markets. That’s another way to protect us. And then finally, until those international factors that caused the problem dissipate, make sure that people’s wages are keeping up and that income supports are keeping up, that doesn’t cause inflation. Protecting people against inflation does not cause inflation. And it’s really important that we say Canadians didn’t cause this problem and we won’t let average working Canadians be the victims of it.

Jordan Jim, thank you for that and thank you for explaining this so well. Even if it wasn’t necessarily a ray of sunshine, I would encourage everyone to check out the center for Future Work if that last answer made more sense to you than an upcoming recession. And Jim, thank you again.

Jim Stanford My pleasure, Jordan. Thank you for having me.

Jordan Jim Stanford, Economist Director of the center for Future Work, which you can head to to check out that six point plan he just referenced. That was the big story. For more from us, you can head to the bigstory podcast, dot CA. You can find all our episodes there. And of course, you can send us feedback anytime you like. We got a couple of letters from listeners who were pleased that we stood up to the person complaining that we weren’t presenting things from the convoys point of view. I also wanted to say a special shout out to the ten people who are right now receiving Big Story tote bags in the mail. They do exist. Thank you for filling out our survey. It took us a little while to get them to you but they are on the way. If you see somebody with a big story tote bag, go up and say hi. You guys have, like, one thing in common, at least. Anyway, you want to give us feedback, it’s hello at thebestorypodcast CA via email and you can call and leave a voicemail 416-935-5935 the other avenue you have for feedback, of course, is by leaving reviews in any podcast player that lets you in. Apple podcast. Right now we have some people who I also think were a little salty about the Convoy episode. You can go read theirs. I’ll spare you, but they’re there if you want to take a look or write your own. We always appreciate the support. Thanks for listening. I’m Jordan Heath-Rawlings. We’ll talk tomorrow.