Front Burner - Everything is expensive. Why?

Episode Date: May 30, 2022

Inflation is obvious in Canada, but the reasons for it are a little more complicated. Prices at gas stations rose above $2 a litre in many parts of the country, while the cost of pasta is up 20 per cent at grocery stores. Canada’s official inflation rate hit a three-decade high in April, rising at a 6.8 per cent annual pace. But what’s behind these sticker-shocking prices can’t be explained by any one factor; the ongoing war in Ukraine, climate change and even some unprecedented monetary policy all contribute to the current situation. Today, CBC business reporter Pete Evans joins Front Burner to sort through the myriad reasons prices keep rising and why the current inflation in Canada doesn’t mean the federal COVID-19 stimulus was a mistake.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hey, I'm Jamie Poisson, and my grocery bill is out of control. Just listen to some of these prices at Loblaws. Pasta, just a regular old bag of penne, three bucks. A sack of their naturally imperfect avocados, the blemished ones, $11. And milk, a two-liter container, almost $5. It's not even organic.

You probably don't need me to tell you right now the prices are up. Not just here at the grocery store, but at the pump too. Or if you're trying to buy a new couch or a car. Just last week, Statistics Canada reported the inflation rate reached 6.8% in April. That's the highest it's been in more than three decades. So today, CBC business journalist and friend of the pod Pete Evans is joining me to explain why pretty much everything feels so expensive right now. Hey, Pete, it is always great to have you. Thank you for being here.

Hey, thanks for having me. So I started talking about the grocery store because I feel like that's where I'm really noticing inflation in my day-to-day life. And when I hear that Canada's inflation rate is almost 7%, I feel like that actually doesn't even cover the price increases that I'm noticing when I buy food, particularly some items. Is that fair to say? Yeah. I mean, you mentioned food and gas being the two things people are sort of talking about most often lately. Those actually, the rates for those who are going up sort of even faster than the headline rate you mentioned there.

It's funny, StatsCan sort of strips those things out and calls them volatile items like food and energy. And the rate's different if you strip those things out. But, of course, those are the things you and I spend most of our money on. But, no, you're not wrong. I mean, it's the things that we tend to buy most often we need to replenish sort of on a regular basis. Those are seeing even higher than the sort of eye-wateringly high baseline level of inflation. Right, right. Food prices up nearly 10%. And then within that, bread, 12%, coffee, 13%. And pasta, pasta is 20%. And I wonder if you could explain to me why pasta is up almost 20%.

Sure. I mean, pasta, the main ingredient for pasta would be wheat, which, you know, we live in a country that has an abundant amount of wheat fields. Most of the prairies grows all kinds of, you know, wheats and oats and canola, that kind of stuff. As it happens, 2021 was a sort of unseasonably warm and dry summer across the prairies, which, you know, most of the wheat you and I get at the grocery store probably comes from Canada. There's different stuff from different parts of the world that's going to go somewhere else. But most of what you and I eat here will be sort of made domestically or maybe in the U.S. So that was already combining to basically make this 2021 wheat crop be kind of smaller and less high quality than usual. The total amount of wheat that Canada produced last year would have been smaller than normal. So if nothing else, if demand stays the same and supply is smaller, that's a recipe for

prices going up. Now, that doesn't explain the whole thing. There's a lot more going on with all of them. But wheat sort of caught in the sort of perfect storm of why it would be going up more than some. Right. And I know another reason why wheat's up is because of the war in Ukraine, right? Yeah.

I mean, so the area in and around sort of Russian Ukraine, that's sort of the like third and fourth, maybe fifth largest producers in the world. So like they are the breadbasket of Europe and all that sort of Middle East region. But since the Russian invasion, farmers have left those fields for safety or to take up arms. Besides, the government banned exports

of staple crops, a wartime measure to attempt to feed Ukrainians as the conflict disrupts the country's supply lines. So like happily you and I, we go to the grocery store, there's still for the most part wheat and pasta and flour and bread on the shelves, whereas that's not the case in other places where we're sort of like there's actual shortages there. Now, that's also combining for, you know, if we have pasta and wheat here and they don't

there, that's going to drive up the price of what we have here even more. Those two major suppliers basically being knocked offline, at least for the next little while, has made a huge hole in the market. Right. Climate change, war. I'm starting to get a clearer sense of why things might be more expensive at the grocery store these days. It's not just stuff at the grocery store that's getting more expensive, though. So what else is going on here? So we're, what, two and a half years into this pandemic. The pandemic is sort of the backdrop to a lot of this stuff,

where basically we all sort of changed the way we live our lives and the things we consume and the things we spend money on and how much money we have coming in starting in sort of March 2020. So basically the economy sort of chugged along and if you were you know like you owned a factory that made widgets you from one year to the next you usually had a pretty good sense of how many sort of widgets you'd need to sell to your customers and you know a good year would grow by 5%, 10%, whatever. And then the pandemic hit and basically threw all those rules out the window. So, you know, demand for widgets went from 100% to let's say zero for some products, right? Like, you know,

think about the things you used to spend money on. Like there's no travel for most 2020. There's like, there's no restaurants, there's no vacations, all that kind of stuff. But I bet you were spending a lot more on sort of goods like, you know, the Amazon deliveries and the groceries and that kind of stuff. Like your sort of money

was being moved around less from these services and more towards sort of goods, right? So all these sort of goods producing industries had this huge surge of demand at a time

when they were trying to keep up too, right? I mean, if I run a factory, you know, to use this apocryphal widget factory, like if I can keep the doors open, I can keep my like, my steel and my copper keep up too right i mean if i run a factory you know to use this apocryphal widget factory like if i can keep the doors open i can keep my like my steel and my copper and my nuts and bolts coming

in and my staff are safe and we're not going to lockdown i can maybe keep up with demand but what if my factory has to shut down right like what if i am making a product that people still want to buy in the pandemic and buy more than they usually do but i can't make it because of the pandemic so that's sort of backdrop for this, where basically there used to be a sort of fairly predictable, maybe seasonality to things you and I want to buy, and that's all gone. And all these industries from goods and services in Canada, the United States, around the world, they're all finding their new balance now that things are, knock on wood, getting back to some semblance of normal. Right. People also talk a lot about the supply chain being an issue here.

And what do they mean when they say that? Supply chain is sort of a fancy term for its simple concept. Basically, it's the links on a chain for every single part of the user and product or service. It's all the steps it has to go through to get there. So if you use something complicated, like let's say a car. So a car that you might buy on a dealership in Winnipeg. You know, the transmission comes from Mexico and the airbags come from Germany and some parts come from somewhere in Asia. And it's maybe manufactured in southern Ontario.

There's lots of links in that chain where like things can go wrong. Either, you know, they're not able to come up with demand. They don't have the right supply themselves. They can't open. They have labor problems. They have labor problems. They have higher costs. They're paying more for energy. So basically every single one of the links in that supply chain can break.

And when it breaks, the whole thing falls apart. What about gas prices specifically? Sure. Why are they so high right now? So gas prices, I mean, all of this is very complicated. Gas prices might be the most complicated one of all. And it's so insidious because it really is a factor in everything, right? I mean, you and I notice gas prices when we're filling up our car with gas to go drive somewhere.

But really, every single sort of good that gets shipped from anywhere around the world, that's going to require some sort of fuel to get there. And most of the time, it's some version of oil. So it's gasoline or jet fuel or shipping or diesel or something. So basically, going back to that supply and demand imbalance from COVID, right, like all this stuff sort of settled down, there was crazy days. And I think price of oil literally went below zero. U.S. oil prices plunged into negative territory. The price settled at, get this, negative $37 per barrel, which is down 305%. Like I've been doing this for a long time. I haven't seen that ever. But that was because people, traders in the oil business were like so afraid about the long-term prognosis. They just

said, listen, I'm going to pay you to get rid of this oil to kick it off my hands because i don't want to be left holding the bag based on this lack of demand so the problem is some of the oil taps why don't you know if i'm an oil producer in this world i'm obviously not going to be you know drilling for more oil and exploring for more i'm going to keep the taps on as much as i need to to sort of pay my bills and keep the lights on and keep my staff employed but there's not really any incentive for me to sell more of my product if I'm losing money on every barrel. So they all sort of like ratcheted down their production in Canada, United States, OPEC, around the world. And now it's slowly coming back, right? Now it's like you and I are going on road trips and knock on wood, like maybe we're going to fly somewhere.

So that demand's coming back, but the supply is still, well, I wouldn't say it's still where it was, but they're reluctant to like fully open the spigots, right? And the other factor in all this, again, would be the Russian invasion of Ukraine. So like Russia is more than happy to keep selling the oil to the world, but the rest of the world is basically learning, hey, you know, like we're kind of financing this. We never really liked this. Let's maybe see if we can find a better way. Let's maybe see if we can find a better way. So during those very scary days of, what was it, February and March of 2022, when the price of oil went from about $8 a barrel to about $140 on the high side,

that was the world saying, listen, we need oil. We're starting to make more stuff, travel, do this stuff. But we don't like the fact that it's coming from Russia. So let's look for alternatives. And that, of course, drives up the price of oil. Okay, so lots of factors here. So many factors contributing to higher prices. One thing I did want to ask you about is like, it is hard to ignore that some of the companies raising prices on us are still reporting like massive profits, right? Loblaws said its profits jumped 40% for the first quarter.

So what kind of concerns are you hearing that companies might be like gouging us right um using inflation as an excuse to raise and boost profit yeah i know it it's certainly a concern it's certainly a thing that i hear you know both in my day job and even in my own personal life um i haven't seen the smoking gun yet like you sort of use the example of blah blahs there which is a fascinating you know going back to you know we all spend money most often at places like the gas station, the grocery store profits are definitely up at all those grocery stores. I mean, I don't know what the numbers are, but like they're basically making much more money in absolute terms than they

were during the pandemic and before the pandemic, but their actual margins, like their actual, you know, like the percentage of how much they make on every product or on every day they're open, they're still kind of in line with what they were, right? The costs have gone up and there's more money being made there. But I haven't seen the smoking gun that, you know, like secretly pasta cost them the same as it always did. And they're just jacking up the price. I mean, it's fascinating to me.

There was that case, what, maybe two months ago between Loblaws and the chip company Frito-Lay. If you're looking to buy a bag of Lay's, you won't be able to do so at Loblaws and the chip company Frito-Lay. If you're looking to buy a bag of Lay's, you won't be able to do so at Loblaws. Now, this is just one example of how inflation is affecting the food industry. They basically had a fight. Frito-Lay wanted to raise their prices for chips. Loblaws was saying, listen, no, you can't.

You're going to keep giving us the same quality and number of chips you always have for the same price. And Frito-Lay said no. So there was, you know, that like terrifying couple of weeks where we couldn't get, you know, certain types of chips at Loblaws. Now, so both of those sides came to an agreement and, you know, like who knows what was said there. But that's an example of grocery store company saying, listen, like, yes, we all have costs going up, but we know if we start selling these chips from $5 a bag to $8 a bag, people won't buy them. So therefore, it's not worth the space on

our shelves. The other sort of more confusing explanation here that I wanted to get your thoughts on, we hear some politicians blame the inflation we're seeing on government spending, right? Or money printing. Right. I think a lot of people will have heard conservative leadership candidate Pierre Polyev talk about this. Inflation has now reached a 30-year high, 6.7%. House prices have doubled. This is the result of government money printing

that has sent more dollars chasing fewer goods, driving higher prices. How does that factor in to higher prices? Sure. So those concerns are obviously getting louder, and he's not the only person saying this, and it is like a valid worldview. I mean, his complaint about the Bank of Canada specifically is interesting. I mean, the Bank of Canada does a lot of different things, but fundamentally the main way they impact you and I and the economy is they set their benchmark interest rate. They don't actually have any sort of power to dictate, you know, a royal bank must charge you this much for this loan and they must charge you this much for this credit card. But what they do is they sort of alter one of their rates, which is the rate that banks loan each other money for short term loans. And they know that that tends

to sort of nudge those banks rates higher or lower. So in a vacuum, central banks cut their benchmark rate when they want to stimulate the economy, when they want to encourage people like you and me to spend and borrow, companies to borrow to invest. And they raise their rate when they want to slow things down like now. So much of the complaint seems to be like pandemic hit. They all slashed their rates to functionally zero. The US did, UK did, Britain did, Europe did, Canada did. They all sort of reacted to this once-in-a-century pandemic by saying, hey, let's make sure lending is cheap so that any person who's teetering on the edge, they might go bankrupt, they might be homeless, they might close their factory. Let's just make sure that we can keep the lights on, keep them afloat by making things as easy as we can for a while. Now, you can quibble with how long those rates stayed low and whether or not they they should have raised them sooner.

That's a valid view. The issue that I have with those complaining about sort of like blaming central bank policy for this is like it's clearly not the only thing going on here. So like pasta is not three dollars a bag where it used to be, too, because of like CERB. The price of gasoline hasn't gone to two dollars per liter from less than a dollar before because of like joe biden stimulus checks it's like one of the factors obviously like when you sort of pour that much cheap lending into the economy it does tend to have the effect of of sort of like raising prices raising inflation but it's not as simplistic as saying well if we hadn't done that it wouldn't find right now you know yeah the other flip side

of that for me is you know picture a world where this once in a century pandemic comes along and we hadn't done that. Like, you know, there hadn't been government spending. There wasn't a stimulus package. The Bank of Canada kept the rates where they were or even raised them. And the reaction was, OK, so those three million people in Canada who lost their jobs in March and April of 2020, hey, too bad for you. You know, like, too bad for you.

Let them go under. Let businesses fail. Let the airlines fail. Let the banks do whatever they have to do. Let people sort of default on their mortgages if they must because at least we'll have low inflation at the end of this. So I have a hard time imagining a world in which, let's say we were there today, Canada would have a central bank rate of 3%

and we'd be the envy of the world with our low inflation. But I'm not sure what that world would look like for us in reality. I mean, COVID would still have happened. We'd still have the same supply chain problems. There'd be the same drought in Western Canada that would have hit the wheat crop. We'd have the same sort of like lockdowns in Asia that would have led to less goods getting here. We may have a lower inflation rate had we done that, but I have a hard time buying that we have a better economy.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you.

Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. Worth underlining here that the Bank of Canada lowering interest rates so low definitely

juiced the housing market. In February, there was a 73.3% increase in home sales in Vancouver compared to 2020. The benchmark or median price for homes is just over a million dollars. In the greater Toronto area, it's a similar real estate story. In February, there was a 52.5% increase in home sales compared to 2020. The average price up 14.9% from a year ago. Yeah, I mean, that's the sort of unintended consequences of that is that it did, the pandemic, instead of pouring cold water on the housing market, was like rocket fuel onto a fire. You know, think about March 2020 where we were.

It basically made people spend 24 hours a day on their houses. They were looking around thinking, listen, I need more house. I need an office. I need a backyard. I need a pool. I need to spend the money here to make my life more tolerable and better because who knows what the future lies. Once rates started going down, it became, I wouldn't say more affordable, but it seemed

more affordable because the monthly payment went down and made attaining better housing possible for lots of people. And there was no downside, right? I mean, like they would have that FOMO of saying, well, listen, I lost that bidding war for that fixed rubber that was priced at $699. I feel like a dummy now at $799. So I'm going to go bid $899 for this house. And I have faith it's going to be worth $999 because my neighbor's house did. So, yeah, so that was certainly a factor.

Now, I think, again, had we raised rates faster, that would obviously have sort of taken away that punch bowl from the party sooner. But I again, I wouldn't pretend that would have been a like painless process. I mean, like the sort of the anxiety and sort of fear we're seeing in the housing market now would be front load, maybe less dramatic and and maybe would have been the right thing to do. but it wouldn't have been sort of, you know, without its own set of consequences. The big takeaway I'm getting from this conversation is that because of the complexity of all of this, it seems pretty clear that you can't just fix one or two of them and prices will just start to come down. Right. I mean, that this is going to be start to come down. Right. I mean. That this is going to be around for a while. Right.

The smart people I talk to every day, you know, Bank of Canada, their own forecast is they hope it's going to come back into their, inflation will come back into their target range of 1% to 3%. Sometime if they're very lucky late 2022, but like most likely 2023. So, you know, it's not like there's anything you could do right now that would snap your fingers and bring the inflation rate back down to something that seems less sort of eye popping. The official rate in the U.S. seems to have sort of topped out maybe a month or two ago. It hasn't turned the corner in Canada. So, you know, it's a 6.8, like you said. I don't think it's going to come in next month at like five or four or three.

But, yeah, at the end of the day, I mean, you know, like we could jack central bank rates up to 5% tomorrow and that would cause a panic and we would still have, you know, death and destruction and, you know, geopolitics and climate change and all these things would still go into the availability and price of everything that we buy. I wonder, even as the rate of inflation does eventually go down, does that necessarily mean that prices for all of these things that we're talking about here will go down?

Like, is it also just possible that we're stuck in a new expensive normal? No, I think you might be stuck with your like $3 pasta for a while. I mean, there's no sequence of events I can see that would make prices to crater beyond something unforeseen happening. But even more so, we wouldn't necessarily want that.

I mean, the opposite of big, scary inflation is something known as deflation, which is actually probably much worse. It sounds great. Oh, yeah, the price of everything is going down. It's cheaper. That's wonderful for consumers. It doesn't work that way

because what actually happens is that you and I would stop buying things. Let's say you want to buy a TV and it's $500 and I know if I wait a month it'll be $400. I have no incentive to spend money because I don't know what the price of things are. And that's much harder to get out of deflation environment than it is to cool down inflation. I mean, it may not be painless, but you know, raising weights will eventually tame inflation. It just has to because it brings down demand for these goods and services as people start to say, look, I'm tapping out. I can't pay $4 for pasta, $5 for pasta. I'm going to switch to something else. Okay. Pete, thank you for this. Thank you.

Sure. Thank you. Thank you. Sure. Thank you. All right. That's all for today. I'm Jamie Poisson. Thanks so much for listening. Talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.