Higher cost of imported goods to eat up Canadian gas savings: report

Canadians may be rubbing their hands with glee at the money they’re saving at the gas pumps, but there are consequences of lower oil prices that could hit other parts of their budgets, a TD Bank report notes.

Canadian households will save an average of up to $800 this year on gasoline as a result of oil’s 50-per-cent plunge since last summer, TD economists say.

However, roughly two-thirds of those savings could be eaten up by the higher cost of imported consumer goods, such as food, clothing and health care products, now that the Canadian dollar has depreciated amid oil’s decline.

“The weaker dollar is likely to put offsetting upward pressure on a number of consumer prices. By our calculations, this pass-through impact may be as much as $600 per household,” says the report, written by TD economists Craig Alexander, Derek Burleton and Randall Bartlett.

Even gasoline prices are starting to creep higher, in part because Canada imports some fuel from U.S. refineries.

“However, on a net basis, households are still likely to end up ahead and to largely spend the savings,’ the report states.

The estimate comes as part of the bank’s updated forecast for the Canadian economy. TD expects economic growth to slow in the first quarter before picking up later this year.

Cost of imported goods to rise

TD economists predict the Canadian dollar will remain suppressed, possibly falling to around 75 cents U.S. in the coming months, a 20-per-cent drop from mid-2014, before the price of oil started to tank.

The lower loonie’s impact is already showing up in consumer prices such as fresh fruits and vegetables, but could take months to creep into the cost of other consumer goods amid stiff competition in the retail sector, said Bartlett of TD Bank.

“A lot of retailers will absorb some of the increase in the short term,” he said.

However, the longer the loonie stays low the more likely costs of imported goods will increase.

“It takes time, but it ultimately it does start feeding into the cost of goods, as retailers are no longer able to absorb the higher costs,” Bartlett says.

Statistics Canada reported last week that the Consumer Price Index (CPI) rose by only 1 per cent in February, compared to a year earlier, thanks to lower gas prices. When gas prices were taken out of the equation, the CPI rose 2.2 per cent year-over-year.

Food prices increased the most, by 3.9 per cent in the 12 months to February, which included a 12.4-per-cent increase in meat costs, 8.4 per cent for fresh vegetables and 3.5 per cent for fresh fruit. Prices for food purchased from restaurants rose 2.8 per cent year-over-year in February, StatsCan reported.

In separate report released last week, TD economist Diana Petramala noted food prices in the U.S. had also been rising until late last year, due in part to drought and disease in some growing regions that has cut global production of various crops.

“This changed in January when food prices decelerated in the U.S., but accelerated in Canada,” Petramala wrote. “Global food price pressures are still the dominant force keeping food price gains elevated in Canada.”

She estimates a third of the increase in January can be attributed to the lower Canadian dollar.

TD is forecasting food prices in Canada to increase by about 3 per cent overall in 2015.

Prices for personal items such as toothpaste and bathroom tissues are also “highly sensitive to changes in the Canadian dollar,” Petramala notes, adding those costs could increase by about six per cent over the next year thanks again to the falling loonie.

TD also expects clothing and footwear prices to see an immediate increase, and rise by about 2 per cent this year, “which in our estimates could be fully chalked up to Canadian dollar pass through,” Petramala wrote.

She said overall prices for recreation, reading and education goods and services will rise by just over 1 per cent, about half of which is due to the depreciating loonie, some taking longer than others to take effect.

“Since the Canadian dollar tends to impact most prices with a four-to-six quarter lag, the full effect of the weaker exchange rate is likely to be felt through the first half of 2015,” she wrote. “The impact of the currency will be largest on items with high import content, which we estimate account for almost half of consumer spending.”