Plunging loonie means inflation in store: Don Pittis

Taking a shortcut through an undergroundmall yesterday, I saw a couplewho looked like Pan Am visitors ogling the low price ofjewelry outside a littledowntown Toronto shop.

Normally,we think of U.S. prices being cheaper than anything you get north of the border.But something special is going on with some Canadiangoods right now.

• Canadian dollar falls to lowest level since 2004
• Weak Canadian dollar gives visitors a reason to cheer

As the Canadiandollar trades at lows not seen since 2004, itmeans that this year'sJuly sales may offer the bestbargains you will see in a while. But it will come at a cost.

Statistical quirk?

The latest plunge is in some ways a statisticalquirk, as you can see in the graph below. By falling under77.85 cents USthe low hit on March 9, 2009suddenly the looniewas worth less that it had been through all the oil-boom years of the 2000s.

While it may be just statistics,there is also a reason why thatquirk may besignificantto long-term pricing, ushering in a new round of sharply higher inflation.

Some goods, like fresh food and energy,can change on a day-by-day or a week-to-weekbasis. If there is frost in Florida, a shortage of oranges shows up in grocery store prices within days.

But for many other goods like clothes, jewelry, books, appliances andcars, prices are far less volatile, says Victoria-based retail consultant Richard Talbot.

Last year's prices

In some cases,wholesaleprices forgoods already in the supplychain were setmonthsago. Mom-and-pop retailersespeciallywill often set their markup on the wholesale prices they paidso that profit on current inventories will be calculated based on what they paid their wholesalers.

"Generally retailers order at least a year ahead of time," says Talbot. "Until that stock is expended, the prices would remain much the same."

For big retailers, frequentpriceswings annoy customers. Theyare also expensive, as catalogues,showroomdisplays and price tags have to be repeatedly updated. That's why short-termups and downs of currency fluctuations are often swallowed by retailers.

But this latest plunge after 10years of fluctuations seems to signal something new.

Further to fall

Now it is time for even the biggest retailers with the deepest pockets to take the falling loonie seriously. And if retailers expect to keep prices steady in the coming year, they have to take account of the fact that the loonie may have further to fall.

If you buy now, you may get the pre-plunge prices. ButTalbot says later this year you can expect to pay prices that take into account a year's worth of currency adjustments.

In some cases you may already be too late.A colleague tells me he was shopping for an anniversary ring at a major retailer lastSunday.

"You were lucky to get in under the wire," the clerk told him, "because on Monday, the prices are going up."

The new prices were already in the display cabinet, andrings in the $500 to $600 rangewere up by $100.

Purchasing power shrinks

As those price rises accumulate, they will be hard for Bank of Canada governor Stephen Poloz to ignore.

Last week, inflation was a relatively mild one per cent as the risingprice offood counteracted falls in energy. Core inflation, which leaves out those volatile items, was up 2.3 per cent, well above the bank's inflation target.

• Inflation is killing off the Canadianmiddle class

But as the summer's bargains turn into autumn price rises in goods normally considered stable, both headline inflation and core inflation could soar.

If your wages rise by the same amount, you will hardly notice. But wages have been stagnant, and people unable to negotiate a raiseor who are locked into three-year contracts well below inflationwill seetheir buying power shrink.

So get out and enjoy those summer sales.By next year, you may have to settle for less.

Follow Don on Twitter @don_pittis

More analysisby Don Pittis