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Businesses hiking prices

Larger and more regular price hikes by businesses keeping inflation “sticky,” says BoC

The Bank of Canada says larger and more frequent price increases by businesses have contributed to keeping inflation higher than the Bank would like.

The comments were made by BoC Deputy Governor Nicolas Vincent during a speech on Tuesday on the topic of pricing practices and monetary policy.

Vincent said the way in which businesses set their prices has changed “substantially” since the pandemic.

“Price increases were larger than normal during this period, driven by the higher costs that firms were facing and helped along by strong demand,” he said, adding that the increases have been more frequent than normal. “We believe that this behaviour by firms—both here and abroad—is intimately linked to the stronger-than-expected inflation we’ve seen.”

After reaching a peak of 8.1% last June, headline CPI inflation then fell to a low of 2.8% this summer, but has since risen again to 4%.

Vincent said that inflation has proven “stickier than many expected,” due in part to global supply disruptions and higher commodity prices that have pushed the cost of goods and transportation higher.

But the impact of price setting by businesses has been another factor that, until recently, the Bank hadn’t fully factored into its modelling, Vincent said.

Previously, most firms avoided frequent price changes for a variety of reasons, Vincent noted, including its complexity, the cost of doing so and for competitive reasons.

But while this is the case in an environment of low and stable inflation, Vincent said the Bank’s previous assumptions about price-setting “may not be appropriate in all situations.”

“When costs are rising fast and demand is robust…we may expect firms to have larger and more frequent price adjustments,” he said. “And while pricing behaviour has been shifting closer to normal since the beginning of the year, progress is slow.”

The government’s response

On the issue of rapidly rising prices, the federal government took direct aim at Canadian grocers last month for what it deems as excessive profits having been made “on the backs of people who are struggling to feed their families,” Prime Minister Justin Trudeau said.

NDP leader Jagmeet Singh has also been critical of the country’s grocery CEOs, noting that food prices have outpaced inflation for 21 months in a row.

As a result, the government has asked the five largest grocery companies to come up with a plan to stabilize food prices by Thanksgiving.

The Retail Council of Canada, however, said any discussions on food pricing would also need to include other relevant businesses in the supply chain, including processors and manufacturers.

Vincent said the current situation drives home the need for the Bank of Canada to get inflation back to its 2% target, which he said would bring back the competitive forces in the economy.

“When inflation is low, price changes stand out more. This forces firms to be more careful about passing cost changes through to their prices,” he said.