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Canadian durable goods inflation


A_Hamilton
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Question for Canadian Board Members-

 

Have you noticed any durable goods inflation with the weakening of the CAD? Are cars becoming more expensive in CAD? What items are imported into Canada and not produced there that might be subject to this effect if any? Curious to understand how this works in real life versus economic theory.

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Definitely.  Basically anything fundamentally priced in USD became more expensive in Canada.

 

Bought a higher-end watch recently and the sales guy told me (i would believe him) the manufacturer will rise price starting in the new year because of the CAD weakness.  Said the same thing re: diamonds.

 

Apple.ca is now selling the iphone 6 for a higher price than when it was first released last year!

 

Wife said vegetable prices have gone up significantly, but that may be due to the weakness in harvest.

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I work for a lighting manufacturer selling to retailers so I can give some insights as to how it works in the background.

 

Manufacturer (us): Canadian dollar went down 15% this year we are increasing our cost 15% in consequence.

 

Retailer: You can't do that, materials went down and transit is cheaper. You should actually give us a price reduction.

 

Manufacturer: You are right but the year before the Canadian $ went down 10% but only increased 5% to give you some relief. Material reduction is less than 5% plus labour went up.

 

Retailer: Ok well you gotta help me on some SKUs, we are partnerts after all right? I'll be above my target of 19.99$ for sure if you don't help.  (the ones I sell the most)

 

Manufacturer:I could do something for you on SKU A and SKU B, but on SKU C there is nothing we can do for you. Maybe we can change the SKU we have this great light made of plastic instead of aluminun, you could keep 19.99$ retail if you go to plastic.

 

Retailer: That is a great idea let's do the change.

 

-----------------------------------

 

All in all you have to see the process as a moving average, the change in currency is not immediately reflected in the retails but they do end up getting there. There are several reasons for the delays:

[*]Prices given to retailers are usually locked in for the year, it's not always in a contract but understood in my industry.

[*]Some companies import and store in their warehouse and then sell to the retailers. If they bough SKU A at an exchange of 1.0 and the dollar is now 0.75 they fail  to account that the goods should go up in price. If there is no outgoing cashflow what's the cost of an item after all?

[*]Retailers, Manufacturers, Factories in China all understand that certain price points generate a lot more volume. Hence they are ready to accept margin compression to keep the sweet spot.

[*]There is a payment terms delay. For example a customer can place a purchase order in january and receive/pay for it's goods in July. During those 6 months the middle man take a currency hit if he was not hedged. The retailer does not necessarily bring it's retail up because he paid the old price

 

All in all in a lowering currency environment you can expect almost all importers in USD to see an eroding margin by some points. The higher the margin the more they can absorb. Losing 1% margin on a 50 points margin item is a lot easier than losing 1% on a 10% margin item.

 

Hope in sheds some light for you.

 

Beerbaron

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Question for Canadian Board Members-

 

Have you noticed any durable goods inflation with the weakening of the CAD? Are cars becoming more expensive in CAD? What items are imported into Canada and not produced there that might be subject to this effect if any? Curious to understand how this works in real life versus economic theory.

 

 

I haven't noticed it too much for durables because I don't purchase them very often.  But I've really noticed it when I travel to the US.  In 2012, when the dollar was at par, I would go to a pub in the US and a burger and fries might be ~$8 and a pint would be perhaps ~$5, for a total bill of ~$13 plus tip.  Compared to the same meal in Canada it was a reasonably good deal because both the burger and the beer would each be at least $1 more for a base cost of $15, and then you tack on the GST/HST and you'd be at $17+tip.  Now in 2016 the US burger and beer are ~$13x1.4 + tip.  Suddenly a lunch in the US actually costs a shade more than in Canada!

 

It's the same thing for hotel rooms. An okay 3-star or 4-star room in the US might have cost $150 back in 2012 when the dollar was at parity, but now that very same hotel room in 2016 costs $210 Canadian dollars.  Hanging out in the US has gone from being slightly cheaper than staying in Canada in 2012 to being considerably more expensive!  I typically spend 30 or 40 nights in the US each year for personal reasons, so I might need to re-think that if the exchange rate keeps dropping...

 

 

SJ

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A few manufactured goods are pricier. 

 

What I have noticed is food inflation.  Anecdotally, it seems really high.  The government stats conveniently hide any real inflation.

 

Agree. I left the country for 3 years from 2010-2013, came back and food prices were up very significantly. Over 2014-15 they seem to be rising as well. I mean I think food has to be up close to 40% in 5 years.

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