Top PM agrees companies' pricing models important in inflation, but other factors matter more
In the press release announcing its recent surprise June rate hike, the Bank of Canada said it would focus on several factors as it continues to assess the dynamics of core inflation. One point of focus, “corporate pricing behaviour,” might have raised some eyebrows – but not everyone is surprised.
“We recently had the European Central Bank highlight rising corporate profits as a significant source of inflation,” says Martin Pelletier, senior portfolio manager at Wellington-Altus Private Counsel. “There was also a recent report by the Organisation for Economic Cooperation and Development (OECD) that also referenced this being part of problem with persistent inflation.”
Price gouging and price-takers
For Canadian investors and advisors, the BoC’s new policy focus begs the question: should we expect corporate profitability to decline as companies scale back their pricing practices?
It depends. According to Pelletier, certain sectors like groceries and consumer staples are maintaining profit margins, and in some cases even widening them. Given that feedstock costs for many products in these sectors have fallen recently, and wages in those areas haven’t risen as much compared to other sectors, it paints a picture of companies that aren’t allowing cost reductions to trickle down to consumers’ pockets.
Pelletier pointed to the recent headline-grabbing case of Canada Bread. Last week, the bakery giant agreed to pay a fine of at least $50 million, admitting its previous management had for years colluded with rivals to raise wholesale prices they charged to grocery chains, which ultimately led to higher retail prices for consumers.
“You’ve seen people like Jagmeet Singh highlighting that with companies like Loblaws. Their profitability will definitely be under the microscope,” he says. “There’s potentially some price gouging by some of these consumer staples companies, but how much of an inflation driver is that? Is it maybe contributing a little bit – but not as much as people expect?”
Oil and gas companies have also been criticized for raising prices even as everyday Canadians face affordability challenges. But according to Pelletier, companies in that space are price-takers rather than price-setters. They have a fixed cost structure on whatever they produce, which means the profit or loss they see on their output is directly related to prices on the open market.
“Banking and telecom are both oligopolies,” he adds, “so those companies have to be especially careful in managing price increases.”
Other inflation factors
While Pelletier agrees a focus on corporate pricing is warranted, he argues other sectors deserve at least as much attention when it comes to rebalancing Canada’s inflation equation. The pricing model for Canadian dairy products, he says, varies substantially depending on prices from other jurisdictions, which leaves Canadians paying some of the steepest prices in the world for a staple part of their household diet.
“You can say the same thing about telecom and cell phone costs,” he says. “We’re paying among the highest costs there.”
Beyond corporate pricing, he thinks the powers-that-be ought to look at other areas as part of a broader approach to maximizing the impact of the BoC’s rate increases. One major factor, he argues, is the persistently large fiscal deficits by the federal government.
“The federal government is providing tremendous stimulus at the same time as the central bank is trying to rein in inflation. I think that’s the much bigger issue,” he says. “That could bring some politicalization to the BoC’s inflation campaign. But it’s a separate entity from the federal government, so why wouldn’t the central bank highlight that as a factor?”
And while Canada’s immigration policies have helped stave off a demographic aging crisis, Pelletier says immigration is also adding more strain to the country’s already-limited housing supply, leading to wildfire-hot housing prices that even the firehose of extreme rate-hiking can’t put out.
“I think the government is going to try and do two things. First, I think they’ll try to pass the blame on to somebody else for something they’re directly causing,” he says. “And given the higher debt servicing costs from their fiscal deficit spending, I’m concerned they’ll look to increase taxes on companies while accusing them of corporate greed.”
