In Canada, higher-priced hot dogs show results of inflation on core costs

  • By Greg Quinn Bloomberg News
  • Tuesday, May 26, 2015 1:57pm
  • Business

OTTAWA, Ontario – Bank of Canada Governor Stephen Poloz’s view that rising prices for meat and other products is a temporary trend doesn’t sit well with Terry Scanlon.

Soaring meat costs forced Scanlon to raise prices by 25 percent last month at Hot Diggitty Dog, his snack cart a few blocks from Poloz’s office here. It’s one of the biggest price hikes since he set up his cart near Parliament Hill in 1983.

“I haven’t made as much as in years before,” said Scanlon, 70, who doubts the beef price gains will be reversed anytime soon. “Definitely the costs have gone up for meat.”

Scanlon’s $2 (C$2.50) hot dog underscores the inflation quandary facing Poloz ahead of his next rate announcement on Wednesday: While overall inflation remains tame, so-called core prices for items such as meat, telephone services and cars keep rising.

Statistics Canada’s inflation report last week showed meat prices rose 11 percent in April from a year earlier and telephone services jumped 6.3 percent. Gasoline prices dropped 21 percent.

“It’s just astronomical right now and it’s still on the rise,” said Michael Frizzell, who owns a meat shop in Charlottetown, Prince Edward Island, where Poloz spoke last week. “This isn’t a short-term thing. This is going to be around for a while.”

Even with the core rate close to the fastest since 2008, Poloz is betting the slack in the economy he expects to persist through next year will keep inflation from surging past his 2 percent target.

While falling energy prices slowed headline inflation to 0.8 percent last month, the bank’s less-volatile measure of core prices that excludes eight items such as fruit and natural gas was close to a seven-year high at 2.3 percent.

Inflation is “noisy” because of shifts such as higher prices for meat and telephone services, tumbling energy costs and a weaker dollar that boosts import prices, the governor said in a May 19 speech in Charlottetown.

“That’s a lot of moving parts, and the impact of each of these transitory forces has to be estimated; we can’t just measure them,” Poloz said. “All of this has certainly made it more challenging to distinguish the trend from the temporary.”

The core rate overstates the case and the true “underlying trend” of inflation is probably about 1.6 percent to 1.8 percent, Poloz said. The economy needs stimulus to restore full output and keep inflation sustainably at a 2 percent target, the governor said.

Bank of Canada spokeswoman Rebecca Ryall declined to comment on this story, citing a blackout on communications ahead of this week’s rate decision.

Small-business owners like Scanlon are predicting faster price increases even with lower energy costs. An April survey by the Canadian Federation of Independent Business shows that its members, which include 109,000 small businesses, expect prices to rise by 2.2 percent over the next year. That matches the fastest in monthly data going back to the start of 2009.

Those kinds of figures raise questions about what happens if oil prices rebound, said Doug Porter, chief economist at BMO Capital Markets in Toronto.

“There are a lot of rumbling numbers beneath the surface,” he said by phone. “The concern I have is what happens if gasoline prices come back, and they’re starting to come back, and you could have a little burst of inflation.”

The Bank of Canada is betting its 0.75 percent policy interest rate will hasten an economic recovery. In response to falling oil prices, Poloz cut the benchmark rate by a quarter point in January and economists don’t expect any change this week.

Meat prices are soaring on reduced cattle herds in Canada, which is the smallest in two decades, according to Brian Perillat, a senior analyst at Calgary-based Canfax, a livestock industry researcher. Strong beef prices and a weaker Canadian dollar are also increasing the cost of pork and poultry, he said.

“We’re really near extreme levels of how short or how limited the cattle supplies are,” Perillat said in a telephone interview.

The price of wieners soared to C$4.39 per 450 grams in April, up 16 percent from a year earlier, and the highest since at least 1995, according to Statistics Canada data. One kilogram of ground beef rose to C$12.59.

Bob Russell, owner of Stoneface Dolly’s in Ottawa, says his restaurant may lose money for the first time in 15 years because he can’t raise prices fast enough to keep up with costs.

Meat products like bacon, eggs and beef— staples on his menu— have always been expensive, he said, and now they’re getting even costlier.

“I’ve already raised my prices and got away with it,” Russell said. “I’m worried about the next year. It’s not looking good.”

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