Grocers would not have taken advantage of the inflationary context to further increase their profit margins at the expense of their customers, according to research carried out by the Bank of Canada.
This is the conclusion shared by Nicolas Vincent, non-external deputy governor of the Bank of Canada, during a presentation on Tuesday before the Chamber of Commerce of Metropolitan Montreal. The economist gave his first public speech on corporate pricing, an area he studied as a researcher.
Supporting graph, Mr. Vincent showed that the increase in prices in grocery stores followed the increase in the price of inputs paid by them.
“Prices have increased at about the same rate as costs in recent years, including when inflation was high,” he said. Based on this analysis, cost increases were therefore fully passed on to prices. »
Ottawa Ultimatum
Nicolas Vincent presented this conclusion as the Trudeau government recently issued an ultimatum to grocers to find ways to stabilize prices. Ottawa has given until Thanksgiving for the big five grocers to present a plan in this regard.
If the federal government considers the roadmap provided by each major retailer insufficient, it threatens to intervene, notably with tax measures.
Food inflation remained persistent, despite the lull in other categories. In August, food prices increased 6.9% on an annual basis, compared to a rate of 8.5% in July, according to Statistics Canada data.
While the conclusion may vary from one sector to another, the Bank of Canada estimates that Canadian businesses did not take advantage of inflation to increase their profit margins, but that they passed on the increase in costs of their inputs to consumers.
“Price increases have closely followed cost increases. That said, even if profit margins have not increased, it is consumers who ultimately pay the bill,” acknowledged Mr. Vincent.
Price increases more frequent than expected
The proliferation of price increases adopted by businesses took the Bank of Canada by surprise, as their high frequency did not correspond to its traditional economic models.
“Prices have a certain “rigidity”, explains the economist. That is, most companies don’t adjust them every time there is a change in their costs, demand, or competition. »
However, this rigidity has softened in a volatile context while companies have increased their prices more substantially and frequently. “The main models used by central banks are not designed to take into account changes in business practices. »
The trend is improving, but Nicolas Vincent recognizes that “progress remains limited”. “Still, companies are talking to us less about overheating demand and seem to be starting to pay particular attention to competitors’ prices again. »
The 2% inflation target
Questioned by the President and CEO of the Chamber, Michel Leblanc, on the relevance of easing monetary policy to avoid a recession, Mr. Vincent defended the Bank of Canada’s target, which is to bring inflation back at 2%. The target has “served the population very well” and the central bank “is determined” to reduce it to 2%, according to him.
“Now we have a range of 1% to 3% so why not stop at 3%, basically. Because if we stop at 3%, the next inflationary shock will take us to 4%, which will take us to 5%. After that, we might ask ourselves: “Do we stop at 4%?” and after that, we go up to 5% and 6%. »
The Bank of Canada will make its next announcement on the key rate on October 25.
Economist Nicolas Vincent judges that the decline in inflation demonstrates that monetary policy “is working”, but he said that it was “still too early to declare victory”. “The persistence of core inflation remains worrying, because it could complicate the return to price stability. »
The Bank of Canada did not want to make Mr. Vincent available for an interview.