Plunging loonie means inflation in store: Don Pittis

Taking a shortcut through an underground mall yesterday, I saw a couple who looked like Pan Am visitors ogling the low price of jewelry outside a little downtown Toronto shop.

Normally, we think of U.S. prices being cheaper than anything you get north of the border. But something special is going on with some Canadian goods right now.

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As the Canadian dollar trades at lows not seen since 2004, it means that this year's July sales may offer the best bargains you will see in a while. But it will come at a cost.

Statistical quirk?

The latest plunge is in some ways a statistical quirk, as you can see in the graph below. By falling under 77.85 cents US — the low hit on March 9, 2009 — suddenly the loonie was worth less that it had been through all the oil-boom years of the 2000s.

While it may be just statistics, there is also a reason why that quirk may be significant to long-term pricing, ushering in a new round of sharply higher inflation.

Some goods, like fresh food and energy, can change on a day-by-day or a week-to-week basis. If there is frost in Florida, a shortage of oranges shows up in grocery store prices within days. 

But for many other goods like clothes, jewelry, books, appliances and cars, prices are far less volatile, says Victoria-based retail consultant Richard Talbot.

Last year's prices

In some cases, wholesale prices for goods already in the supply chain were set months ago. Mom-and-pop retailers especially will often set their markup on the wholesale prices they paid so that profit on current inventories will be calculated based on what they paid their wholesalers.

"Generally retailers order at least a year ahead of time," says Talbot. "Until that stock is expended, the prices would remain much the same."

For big retailers, frequent price swings annoy customers. They are also expensive, as catalogues, showroom displays and price tags have to be repeatedly updated. That's why short-term ups and downs of currency fluctuations are often swallowed by retailers.

But this latest plunge after 10 years of fluctuations seems to signal something new.

Further to fall

Now it is time for even the biggest retailers with the deepest pockets to take the falling loonie seriously. And if retailers expect to keep prices steady in the coming year, they have to take account of the fact that the loonie may have further to fall.

If you buy now, you may get the pre-plunge prices. But Talbot says later this year you can expect to pay prices that take into account a year's worth of currency adjustments.

In some cases you may already be too late. A colleague tells me he was shopping for an anniversary ring at a major retailer last Sunday.

"You were lucky to get in under the wire," the clerk told him, "because on Monday, the prices are going up."

The new prices were already in the display cabinet, and rings in the $500 to $600 range were up by $100. 

Purchasing power shrinks

As those price rises accumulate, they will be hard for Bank of Canada governor Stephen Poloz to ignore.

Last week, inflation was a relatively mild one per cent as the rising price of food counteracted falls in energy. Core inflation, which leaves out those volatile items, was up 2.3 per cent, well above the bank's inflation target.

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But as the summer's bargains turn into autumn price rises in goods normally considered stable, both headline inflation and core inflation could soar.

If your wages rise by the same amount, you will hardly notice. But wages have been stagnant, and people unable to negotiate a raise or who are locked into three-year contracts well below inflation will see their buying power shrink.

So get out and enjoy those summer sales. By next year, you may have to settle for less.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis