Groceries are one of the larger expenses that many households have to deal with. According to an annual report released by Dalhousie University and the University of Guelph, grocery costs are set to rise.
Year over year rising food costs probably sounds normal. However, because it is partial induced by the pandemic the effects might be wider reaching than just a few extra dollars out of your pocket.
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Grocery Bill Going Up
In the 2020 edition of the Canada Food Price Report, we are told that food prices will rise by an average of 2-4%. This may not seem like a big increase if you are a single person. However, based on 2019 numbers, the average Canadian family spends more than $12,100 a year on food.
The report predicts that the average family will spend $487 more on food. That’s a considerable increase when in 2019, 53% of Canadians were living paycheque to paycheque. It is easy to believe that many more are just scraping by now with the pandemic causing many to lose sources of income.
You may think that because grocery prices and other everyday items are increasing in price, that a person’s wage should increase too. In theory, you would be right. However, there is a discrepancy in the inflation rate of things like groceries and the stated general inflation rate.
Food, as noted above, is expected to rise 2-4%, with meat inflating the most by 4-6%. Yet, general inflation in Canada for 2020 is forecasted at 0.62%. This means if you are an average Canadian earning ~$55,000 your income will increase by $341. That is if your employer offers wage increases to match inflation. That inflation wage increase doesn’t even cover the increased cost of food, let alone everything else that is increasing in price.
If you’re interested in our take on inflation, check out the following
- Is Hyperinflation on the Horizon
- Helicopter Money to Increase Short-Term Inflation 2020?
- Inflation the Thief of Your Future
- Inflation is Higher Than You Think
Why Is Your Grocery Bill Increasing?
There have been multiple factors that have contributed to rising food prices in the last couple of years. There was an E. coli outbreak, a swine fever outbreak, a global fish shortage, trade wars, and supply chain constraints with the recent pandemic.
Back in 2019, there was a large E. coli outbreak. This caused the price of vegetables to increase in price by 17%. The African swine fever saw the price of pork increase more than expected.
The fish market is notoriously volatile. This volatility mixed with fish stock being on the brink of collapse, saw fish prices increase 5% when they were predicted to fall.
Furthermore, the strain on the supply chain caused by a global pandemic saw multiple meat processing plants shut down for extended periods of time causing meat shortages. Livestock farmers had no outlet for their product, so culled their herds and drastically cut back on the numbers of livestock they were raising for market.
In addition to the supply constrains the never-ceasing trade war has restricted flows and increased cost of inputs like feed. Both causing shortages in availability of end products and straining the delivery system.
A run on Commodities
If the production and supply of food remains constrained, it could lead to a run on commodities. We talked about a couple extreme cases of runs on commodities in Is Hyperinflation on The Horizon?
As food prices continue to rise, it may lead people to start purchasing mass amounts and stocking up. This would generally start with non-perishable items. We haven’t seen this excess demand yet, but if the price of food or other goods and services rises at extreme rates, it is very likely.
In our hypothetical scenario, demand has now increased substantially. The constraints on the supply that we are already seeing will continue to grow. If this happens, eventually there will not be enough supply to satisfy the new found demand. When supply is no longer sufficient, the price of the inputs to that supply increase. So, what raw materials go into the products you’re buying?
Commodities like wheat, corn, soybeans, fertilizer, gas, oil, steel, copper, etc. The price of these raw inputs will increase. As the price of the input increases, the price of the final product also increases. It is a vicious cycle that happens if inflation gets out of control. This type of inflation is called demand-pull inflation.
In the end, even though a what seems like small price increase, can set off a chain reaction. We have to hold our policy makers and central banks accountable. Taking all the factors mentioned above and coupling them with our current quantitative easing policies, we are heading to a potentially detrimental destination.
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