What drives up the price of groceries

As the economy began recovering from the early impacts of the COVID-19 pandemic, Canadians experienced high inflation on many goods and services, but prices of groceries went up faster than those of many other goods. The Bank of Canada closely monitors grocery prices, which are included in Statistics Canada’s measure of annual inflation: the consumer price index. Many factors affect grocery prices, including the cost of energy, labour and transportation, as well as exchange rates and the size of a harvest.

Lots of energy is needed to produce large quantities of food

Growing food requires energy. Farmers use equipment that runs on diesel fuel or gasoline when they plant and harvest crops. The fertilizers that farmers use to improve their crop yields also require energy to produce. Fertilizers are made of materials like potash, which is mined. They help farmers grow more food on less land, but also make agriculture energy intensive. Agricultural products also need to travel to food processing facilities and grocery stores. The trucks, trains, ships and planes that transport these products all require fuel.

So, when energy prices go up, so too can food prices. Farmers, fertilizer producers and transportation companies all have to pay more for fuel. That makes it more expensive to take food from the fields and get it to grocery store shelves. These costs may be passed on to consumers and can contribute to price increases.

Weather conditions can help or hurt a harvest

The weather in agricultural regions plays a significant role in determining the size of a harvest. When the weather is too wet or too dry, farms produce less food. But people don’t eat less when this happens, so the ongoing demand for food pushes prices up.

Climate change is causing more severe and frequent extreme weather events around the world. This has been one factor driving up food prices in Canada. A lot of the food in our grocery stores comes from regions such as California and Mexico where farmers can cultivate crops year-round. But the weather has negatively affected harvests in those regions in recent years.

Farms in Canada have not been immune to harsh weather either. In 2021, Western Canada experienced a severe heat wave and drought conditions that affected the harvest of grains. Wheat saw some of the steepest price increases of any food product. Meat prices were also affected. The extreme heat scorched the grass in fields where cows would normally graze, forcing farmers to buy feed for their animals. That created extra costs for farmers, and consumers ended up paying more.

Labourers are needed to plant, grow and harvest crops

The cost of labour is another factor that contributes to grocery prices. Farms employ labourers to plant and harvest crops, and grocery stores pay employees to stock shelves and help customers. Food processing plants need workers, too. Increased labour costs contribute to higher costs for food producers and grocers.

Exchange rates affect how expensive international products are for Canadians

Canada imports a lot of food, especially during the winter when much less is produced domestically. High levels of imported food mean that exchange rates—particularly for the US dollar—affect grocery prices here. When the value of the Canadian dollar is lower against the US dollar, it takes more Canadian dollars to buy food from American farmers. This means that prices at the supermarket are higher.

Maintaining price stability

Some of the factors that contribute to higher grocery prices are global in scale. The price of oil is set on international markets, and no one can control the weather. But inflation can be managed.

By targeting an inflation rate of 2%, the Bank of Canada aims to keep inflation low, stable and predictable across the economy—including for groceries.