Consumers bracing for shock

Consumers will pay more for everything from scarves to sugar cookies this holiday season as relief from high commodity costs isn’t expected to trickle down to store shelves any time soon.

Consumers will pay more for everything from scarves to sugar cookies this holiday season as relief from high commodity costs isn’t expected to trickle down to store shelves any time soon.

The latest inflation data shows Canadians are paying about three per cent more for products than they did last year, largely due to a spike in everyday expenses like groceries and gas.

Meanwhile, retailers, who have seen their profit margins squeezed due to higher raw material costs on staples like cotton, plastics, sugar and flour, are unlikely to slash prices.

Statistics Canada said Friday that the annualized rate of inflation was 2.9 per cent in October, down slightly from where it was in September but still taking a bigger toll on consumer finances than last Christmas.

Canadians paid 18.2 per cent more to fill up at the gas station and 4.3 per cent more for food than they did last October, the federal agency reported Friday.

As a result, consumers are putting aside more of their income to spend on those essential goods, said Sonya Gulati, an economist at TD Bank (TSX:TD).

“If more of your monthly budget is allocated to those essential goods, you’re going to have less discretionary ability to spend on things like holiday presents.”

The annualized inflation rate in October was down three-tenths of a point from September, the start of what analysts expect is a trend to lower inflation.

But Gulati said it could take months before that trend works its way through the market to consumers.

“If you take a look at things like energy prices and food prices, they tend to be what economists call very sticky,” she said.

“There tends to be quite a lag between when the headline number is posted to when consumers actually feel it because it has to ripple through the economy.”

Consumers shouldn’t expect to see price relief from heavy discounting either, said Jim Danahy, a consumer goods and marketing expert at retail consultancy CustomerLab.

Some retailers have passed on price hikes to customers and lost sales, while others have absorbed the costs, increasing expenses.

And given the uncertain economic climate that has taken a toll on consumer confidence, many have chosen to pare down inventory rather than offer heavy discounting in the critical holiday shopping period.

“When you’ve got an overall inflation in the three per cent range . . . and it’s influenced by 12 and 15 per cent increases in the cost of driving those goods to your stores, the net uplift that the retailers are getting has been eaten into significantly,” he said.

“As a result most retailers have been doubly cautious on their holiday merchandise inventories. They’ve ordered less and are prepared to simply run out.”

Retailers have reduced inventories this year hoping to avoid a repeat of 2010 and 2008 when they got stuck with too much product because shoppers stayed home late in the season.

Montreal-based toymaker Mega Brands (TSX:MB) — maker of the popular Mega bloks building sets — said it is feeling the effects of retailer caution while it also copes with higher resin costs.

Some clothing companies have said they expect prices to rise about 10 per cent by the December holiday shopping season.

Vancouver-based activewear retailer Lululemon Athletica Inc. (TSX:LLL) said earlier this fall that it will pass some of its higher costs on to customers but only on certain items.

In addition, Canada’s largest grocers, Loblaw (TSX:L), Sobey’s (TSX:EMP.A) and Metro (TSX: ) have all increased prices this year, as have Maple Leaf Foods (TSX:MFI) and Tim Hortons (TSX:THI).

Raising prices is not a light decision for retailers, especially in a volatile economic climate, Gulati said.

And they may not be so eager to pass on any eventual savings to consumers who have already become used to paying more.

“There is that concern about confidence about where the recovery is going, so they may want to be hedging their bets in terms of making any sort of price changes or new decisions,” she said.

“Once retailers raise prices they don’t tend to like to decrease them later on. But at the same time, with the concern about profits and just making sure you’re in the positive, they may actually have to go against that.”