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Food inflation: the worst is yet to come for your wallet

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You feel like your money at the grocery store is running low. Normally, the grocery basket jumped nearly 10% in April compared to the same period last year, Statistics Canada said. And the upward pressure on the stalls will continue, according to Desjardins chief economist Jimmy Jean.

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The strategist answered questions from Gérald Fillion on the show Economy zone Wednesday night.


Is Ukraine’s impact really in the data published Wednesday by Statistics Canada on inflation, with food in particular? Is this what impresses us most?

JIMMY JOHN It’s starting to show, but the worst is likely to come yet. When you look at the import price indices, there are huge increases. These are the contracts that are often discussed in advance about inventories. So, it’s a safe bet that it will be a long time before we feel the full impact. [de la croissance de l’inflation alimentaire]. But we must not forget that we had problems and pressure on the harvest when the war started in Ukraine. We already had significant pressure on the power supply. So the risks remain upside down and it forces consumers to make choices, perhaps to go to restaurants less or to shop a little more.

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Inflation was at 6.8% in April compared to the same period in 2021, up 0.1% from March data. Are we heading for a plateau or will inflation continue to accelerate?

not a word Risks are rising and the forecasting community is extending the time before inflation drops. What this describes is that it is a completely new situation. We have never been to a situation where we are coming back from a pandemic, there are still logistical problems, countries having difficulty with pandemic issues and there is a war. It is very difficult to predict this type of environment. This is part of inflation that is very atypical.

But what makes the matter worse is that we have a share of inflation that is very typical, associated with a very tight job market. There are also salaries that even though they have not yet kept pace with inflation, there is the intention and there is the pressure. Expectations are starting to rise. So there are still risks of inflation going on and central banks need to take it which is probably more serious than they did.

The Bank of Canada is sending signals to rise on June 1 by 50 basis, half a percentage point, and in July another half a percentage point. Is this enough to slow or reduce inflation?

NOT A WORD – This is questionable. Because even with these 100 additional basis points, we are at 2% nominal interest rate. And if you look at inflation, that is, monetary policy is in very accommodative territory. There are some former Federal Reserve leaders in the United States who argue that rates should be around 5 or 6%. This will be extreme. The reason we are cautious is because we don’t know what is really really associated with the cycle [économique] and what is associated with supply shock. But there is a need to raise rates.

If we raise interest rates too quickly, isn’t there a risk of causing a recession?

NOT A WORD – If we do it too fast, it will be too destabilizing. But it is still necessary that in the short term, there is a relatively muscular sequence to at least return to neutrality. Monetary policy should no longer be as accommodating as it is today. After that, we need to take the pulse. See the real estate market. We saw this in 2019, we reached a key rate of 1.75% and the real estate market slowed down. We will see the same thing this time.

Are rising rates calming the real estate market?

NOT A WORD – Absolutely. We saw this in this week’s numbers, with a drop of more than 12% in sales in the country, we even saw the price index across Canada go down. This is very early in the downturn cycle. It usually takes a few hours before prices start to fall, that’s where we see the weakness. It was also a sign that there was joy. The impact of rising rates makes it difficult to qualify for a mortgage and making payments more expensive. And that’s how monetary policy works. It is by slowing down the components that are sensitive to interest rates – real estate and buying durable products such as cars and furniture – that all will be called to slow down in an environment where the real estate market will slow down.

Would you say that there is a real loss of purchasing power for Canadian households today?

NOT A WORD – Absolutely. And that’s what has changed compared to 2020-2021. People were amazed at the fact that disposable income had increased, that household savings had increased. But if you look at those variables now, and then factor in the impact of inflation, it’s very normalized. We can say we are around the trends that existed before the pandemic, but it is less colorful compared to the past few months, due to the strength of inflation. Yes, there is an erosion of purchasing power, but it is a necessary evil. If we want to slow inflation, we need to slow demand. We must slow down consumer enthusiasm.

Some statements have been edited for clarity and accuracy.

Source: Radio-Canada

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