Corporate Price Hikes Worsen Inflation Strain on Consumers, Bank of Canada Observes

Last week, Bank of Canada head Tiff Macklem says companies are typically reluctant to raise their prices for fear of losing customers, but high inflation has made them much more willing to do so lately, without worrying that consumers will tap out.

As inflation continues to weigh heavily on Canadians, corporations are rapidly passing increased costs to consumers, intensifying the inflationary burden.

In a recent examination of the ongoing inflation dilemma facing Canadians, it has become apparent that corporations are more readily increasing their prices, adding to the pressures of inflation on consumers. This insight comes as the Bank of Canada takes a closer look at the inflation trends and the role of corporate pricing behaviour, according to remarks made to a parliamentary committee in Ottawa.

Bank of Canada‘s Governor, Tiff Macklem, voiced concern over a new trend in the corporate sector’s response to rising input costs — a departure from the cautious approach historically taken when it came to passing costs onto consumers. “For much of the past few decades, businesses were pretty cautious about passing on [cost increases] into the prices they charged for goods and services,” Macklem explained, noting that businesses feared losing customers. However, this caution has waned amid recent inflationary pressures, with Macklem stating, “When input prices have gone up… those are getting passed through much more quickly to final goods prices. So households are bearing the full inflationary impact much more: that’s what we can see pretty clearly in the data.”

Quantifying the extent to which corporate price hikes contribute to Canada’s current inflationary problem is challenging, Macklem admitted, but international counterparts like European Central Bank President Christine Lagarde have been forthright about similar trends abroad. According to Lagarde, corporate profits were responsible for about one-third of inflation for the two decades leading up to 2022. That figure jumped to two-thirds last year, indicating a significant increase in the share of consumer expenditure absorbed by corporate earnings.

People select fish products at a grocery store in New York, the United States, Nov. 14, 2021. October’s Consumer Price Index, which is a measure of a basket of goods, climbed a whopping 6.2 percent from the same month last year, and now stands at a 30-year high. The cost of staple food items — meat, eggs, fish and poultry — has soared 10.5 percent for the year ended Sept. 2021, reported the Bureau of Labor Statistics. (Photo by Wang Ying/Xinhua via Getty Images)

The term “profit-led inflation” has been introduced by Paul Donovan, a London-based economist at UBS, to describe the phenomenon where businesses leverage consumer belief that price increases are justified. Donovan, in an email to CBC News, indicated that such inflation persists until consumers reject the narrative justifying the price hikes. He pointed out that this tipping point seems to be occurring in Europe, with the grocery sector showing signs of resistance and concessions to consumer pricing fatigue.

The U.K.’s experience with price resistance is telling, as reported by the British Retail Consortium, which noted a monthly decline in food prices for the first time since 2021 — a direct result of retailers providing substantial discounts to retain loyal customers after seeing a shift in consumer behaviour.

Similarly, in the U.S., the Federal Reserve Bank of Kansas City found that markups increased by 3.4 per cent in 2021, implicating them in up to half the rise in the U.S. inflation rate that year.

Jim Stanford, an economist and director at the Centre for Future Work, commended the candidness of central bankers in recognizing the disproportionate role of corporate profits in driving inflation. Stanford criticized the long-standing focus on “so-called overheated labour markets” as a primary inflationary factor, a narrative he believes is now being reassessed.

The counsel for consumers to curb expenses or augment income appears increasingly misplaced as Stanford points to evidence that consumers are nearing their financial limits, with sales volumes decreasing in grocery and retail sectors. He cautions against the notion that consumers should be responsible for mitigating inflation by becoming more diligent in seeking bargains.

Encouragingly, recent data from Statistics Canada indicates a shift towards normalization, with profits retreating from their heightened pandemic levels. “The last two quarters in Canada have seen a partial but significant return of profitability back toward normal levels,” Stanford revealed.

This emerging trend suggests a correlation between the rise in profits during the post-pandemic period and the surge in inflation, as well as a parallel decrease in both as the situation begins to stabilize.

In conclusion, the interplay between corporate pricing strategies and inflation highlights the complexities of economic recovery in the post-pandemic era. As the data suggests a potential easing of profit-led price hikes, the attention of policymakers and economists remains fixed on balancing corporate practices with the broader economic well-being of consumers.