Could inflation help grocery stocks roll with minimum-wage punches?

the added costs will hit Canadian retailers hard, as they employ many minimumwage workers, with companies examining ways to offset the increased expenses, which may include possible job cuts.

reported its latest results this week, with management saying the minimum-wage increases in Ontario would add costs of between $45 million and $50 million in 2018. The Montreal-based company also “largely” attributed a yearover-year decrease in samestore sales to deflation.

Metro’s returns, however, have jumped during times of medium and high inflation, along with those of other grocers, National’s research showed. Since January, 2000, high inflation periods (above three per cent) coincided with an increase in Metro’s average year-overyear returns of 33.2 per cent. Returns for

increased by cent, and by 10.6 per cent.

During medium inflation periods, (0.5 per cent to three per cent), Loblaw average year-over-year returns increased by five per cent, Metro’s by 12.6 per cent, and Empire’s by 13.6 per cent.

Loblaw has seen 3.6-percent growth in its year-overyear returns during low inflation periods (0.5 per cent or lower), National’s figures show. Meanwhile, Metro reported a 1.7-per-cent increase and Empire a 1.6-per-cent decrease in returns during the same periods.

As of Friday’s close, Loblaw shares were down about 4.2 per cent since the start of 2017, while Metro stock was up around 4.1 per cent on the year and Empire had gained approximately 38.1 per cent.

Still, National warned a stronger dollar and increased competition could offset gains. Grocers may not be able to implement all their mitigation measures in 7.7 per time either, the bank said.

National’s research also showed that Ontario increasing its minimum wage in 2014, to $11 from $10.25, was followed by stronger food inflation than the rest of Canada.

“In addition, we believe that the grocers will start testing out higher prices in advance of the minimumwage increases being implemented,” added Shreedhar. “As a result, we expect upward price pressure over the coming months as the grocers evaluate strategies.”

A Wednesday research note from Raymond James maintained an outperform rating on Metro, and said they remain buyers of the stock. One of their reasons was “the 2018E wage inflation fears’ impact on earnings power currently priced into the grocery group overstates the reality.”

RBC Capital Markets noted a possible benefit for Metro would be a “potential return to slight inflation as retailers pass some of the cost increases.”

Desjardins Capital Markets noted this week that the stronger loonie could offset some of the increased labour costs as well. “The combination of the U.S. grocery industry returning to inflation in July (after 19 months of deflation) and the sharp recent increase in the value of the Canadian dollar may assist the Canadian grocery industry in compensating for the upcoming increase in the minimum wage in Ontario.”

CIBC economist Andrew Grantham wrote Friday the 1.2-per-cent increase in the CPI was in line with expectations and still below the Bank of Canada’s two-percent target.

“Food prices edged up again, and are now becoming a support to inflation on a year-over-year basis as well,” noted Grantham.