08/10/2012 12:51 EDT | Updated 10/10/2012 05:12 EDT

Drought to push food prices up about four per cent in 2013, says CIBC

OTTAWA - Canadians can expect to starting paying higher prices for food in the coming months, peaking at about four per cent more sometime next year, the CIBC says in a new report.

The bank's chief economist, Avery Shenfeld, said the estimate is based on projections of the impact of the severe U.S. drought, which has hit corn and soybean yields but it also pushing wheat and barley prices higher.

Although four per cent food inflation is double the current rate, it is about half the 2008 shock, which triggered food riots in some parts of the world and pushed the cost of food up 7.9 per cent in Canada.

"In 2008, it was a broader range of geographies and crops that were affected" including rice, a staple in many regions of the world, Shenfeld said.

"Today, the rice supply is still reasonably healthy."

As well, Shenfeld said that wheat in many drought-affected areas in the United States had been harvested before the rains stopped earlier this summer.

The CIBC estimate is at the higher end of a range of forecasts by economists on food inflation, the worst of which will likely not be fully felt until next spring or summer. Historically, a commodity price shock is most felt at the retail level nine to 12 months down the road.

Shenfeld said the repercussions are not all negative. Canadian farmers will likely gain, particularly since they have not been hit nearly as hard by the drought but will still benefit from higher global prices.

But overall the effect on the economy is negative since it will put a squeeze on household buying power and likely raise the inflation rate a few tenths of a point higher than it might have been. Annual inflation currently stands at 1.5 per cent.

Given the already weak conditions, a spike in food prices will have a ripple effect on other aspects of the economy, said Shenfeld.

"When there's ample (economic) slack, wages can't chase these sectoral spikes in prices, so the loss in buying power depresses prices elsewhere in the economy," he explained.

"While Canadian wage rates have shown some healthy momentum in the last few months — (3.6 per cent in the latest employment report released Friday morning) — we expect that to dissipate in the face of weaker job gains," he added.

TD Bank chief economist Craig Alexander noted that even though incomes have continued to rise in Canada, the gains for Canadians in low-paying jobs have been scarcer and more moderate.

"A four per cent increase in food prices is a significant hardship for low income Canadians because they are not getting a wage increase anywhere remotely close to four per cent," he said.

But overall, he said the effect on the Canadian economy would be modest.

Shenfeld agreed. He said food prices rose slightly above four per cent annualized in 2011 without seriously affecting the overall inflation rate.

"So don't expect any lift to assets like gold that benefit from higher inflation expectations, or any direct damage to bond yields," he said.