On food inflation, the federal ‘grocery rebate’ is not the solution, but the problem

Article By SYLVAIN CHARLEBOIS Published May 31, 2023
Article Source: Opinion: On food inflation, the federal ‘grocery rebate’ is not the solution, but the problem - The Globe and Mail

Sylvain Charlebois is a professor of food distribution and policy and the director of the Agri-Food Analytics Lab at Dalhousie University, and co-host of The Food Professor Podcast.

Many Canadians are wondering why food prices are not dropping at the same rate as agricultural commodity prices right now.

The reason is simply this: A number of factors increase grocery prices. These include labour challenges and wages, along with measures such as carbon pricing and currency fluctuations. There is also the issue of trade restrictions and embargoes. Not to mention packaging costs and adjustments to changing regulations.

Supply chain economics are also impacted by many factors, where the effect of numerous transactional costs outweighs how input costs impact retail prices. Meanwhile, companies such as PepsiCo Inc. have hiked their prices to protect profit margins.

But the other culprit rarely talked about is public spending. The “grocery rebate” the federal government introduced in this year’s budget is a one-time rebate of the goods and services tax that gives households a maximum of $467. But it doesn’t help our food inflation problem one bit; instead, it exacerbates it. The rebate reflects a long line of bad decisions by our governments.

Your personal inflation rate: Calculate how you compare to the Canadian average

Over the past few years, since the start of the COVID-19 pandemic, many governments, including Canada’s, have spent significant amounts to provide socio-economic safety nets for people in need. Companies have also received funding to cope with economic uncertainties.

The grocery rebate 11 million Canadians will receive on July 5 is relatively small compared with all that. But coupled with many provinces sending more money to voters as governments politicize food inflation, this extra $2.5-billion program could push food prices higher, hurting more people along the way.

When a government injects more money into the economy, the excess liquidity can drive up demand for goods, including food, which, in turn, can lead to higher prices. Furthermore, when people have more disposable income owing to government expenditure, they tend to spend more on a variety of goods.

Even if food is essential, extra consumer discretionary expenditure can and will affect food prices. The increased demand for food can put upward pressure on prices, especially if the supply of food does not keep pace with the growing demand. Of course, the specific outcome of more government expenditure depends on various economic and contextual factors, but still, it can’t be overlooked.

That is especially so when the factor on which everyone blamed high grocery prices has waned – yet prices remain stubbornly high.

Last year, the devastating invasion of Ukraine by Russia pushed agricultural commodity prices to astronomical levels. One year later, prices for some of those commodities have dropped by nearly 50 per cent. But our research group, along with others, concluded many years ago that the correlation between commodity prices and retail prices is, for the most part, weak.

That is partly why governments don’t mind the attacks aimed at grocers and the food industry. With the commodity prices declining, the Ukraine war ceases to be as much a factor in high food prices. Grocers thus now make for a convenient distraction. Consumers avoid focusing on how governments have really made inflation, and food inflation, an unmanageable problem for many of them.

Call it policy pivoting, if you will. It’s much easier to point the finger at the likes of Galen Weston than explain to the populace how monetary and fiscal policies actually work and how those policies can work against consumers over time. This argument is indeed central to the discourse on so-called greedflation.

At least Canada is not implementing measures such as those in Britain. Supermarkets there are facing pressure to cap food prices on select foods, with a voluntary approach allowing retailers to pick which items to offer at lower rates. This type of measure can only lead to chaos, higher food prices and more shortages over time.