There could be another wave of inflation coming for the Canadian economy as tariffs begin to work their way into the economy. Combined with lower interest rates and more potential cuts from the Bank of Canada (the BoC), inflation may very well continue creeping higher again. Indeed, it’s a bit discouraging to learn that inflation is bouncing back a bit after hovering around the 2% level earlier this year.
And while the long-term average in the range of 2–3% may be acceptable, there’s no arguing that it still hurts to hit the checkout counter at the local grocery store. Everything still feels unreasonably expensive despite the rate of inflation slowing in recent years. Indeed, low inflation doesn’t mean prior price hikes will be rolled back.
Rather, it means the pace of increases will slow. As inflation picks up again, things could feel much worse for the Canadian consumer as they deal with tariff-era price increases on top of the post-COVID inflation that seems to have left things drastically unaffordable for many. As more Canadians opt to shop Canadian, while retailers opt to reduce their imports of affected U.S. goods, perhaps the next inflation peak won’t be as high as it was just a few years ago (close to 8% back in June of 2022).
In any case, I believe we’re moving back to an environment where affordability will dictate where a consumer shops. That means discount retail will probably win over more business from those who recently “upgraded” to their higher-end rivals.
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Loblaw is doing almost everything right
Regarding low prices and groceries, Loblaw (TSX: L) seems to be a king among men. With new No Frills (which concentrates on the lowest-cost goods) opening up across the country, many value-seeking Canadians will have more places to stretch their dollar as far as it can go as inflation creeps well above the 3% rate again. Indeed, Loblaw stores are certainly not able to absorb the shock of higher costs on a broad range of goods.
However, they have taken steps to beef up their supply chains. With U.S. tariffs and hefty food inflation continuing to weigh, Loblaw made moves to procure more goods from Canadian suppliers. Naturally, this domestic sourcing will help Canadian consumers steer clear of the tariff inflation impact. As Loblaw opts to “buy Canadian,” many consumers may more naturally gravitate toward the all-Canadian grocer with the aim of saving money while also protesting Donald Trump’s tariffs.
Combined with a nice expansion plan (80 new stores in 2025), most of which are discount grocers, it’s not a mystery as to why many investors seek comfort in the shares. It’s a tariff-resilient defensive growth staple, and it’s got what it takes to move even higher.
At $220 and change per share, L stock goes for 30.7 times trailing price-to-earnings (P/E) with a 1% dividend yield. It’s expensive, and the yield is lacking. But given the resilient growth narrative, I believe the premium price is well worth paying for a retailer that’s doubling down on its discount retail expansion.
Could Loblaw stock be headed to $300 in three years?
In the next three years, I think L stock could test the $300 level if it’s able to keep executing on its game plan which, I believe, benefits Canadian consumers looking to dodge and weave past the nasty tariff war with the U.S.
