Inflation has become a prominent headline in recent times, and for good reason. In September, inflation in Canada eased slightly from 4% in August to 3.8%, as reported by Statistics Canada. While this dip might appear as a welcome change, it’s crucial to delve deeper into the broader implications of this softening rate environment and how it impacts the daily lives and financial well-being of Canadians.
Mortgage and Rent Costs: A Double-Edged Sword:
A significant contributor to the 12-month change in the Consumer Price Index (CPI) is the rising costs of mortgage interest and rent. Mortgage interest payments increased by a substantial 30.6% compared to the previous year, while rent saw a yearly increase of 7.3%. At first glance, these numbers may raise alarms, but it’s vital to analyze them within the context of Canadian economic dynamics.
Benjamin Tal, Deputy Chief Economist at the Canadian Imperial Bank of Commerce (CIBC), argues that the price growth related to mortgage interest and rent payments may actually have a disinflationary effect. In other words, these rising costs could temper consumers’ spending appetites. This perspective suggests that when we factor out these significant year-over-year increases in mortgage payments, the Bank of Canada might be closer to achieving its 2% inflation target than recent figures suggest.
Monthly Cost of Living: A Slight Decline
Interestingly, on a monthly basis, the cost of living decreased by 0.1% in September, marking the first such decline since November of the previous year. This decrease was partially attributed to a 1.3% drop in gasoline prices during the month. However, it’s worth noting that gasoline prices remain elevated, with a 7.5% increase over the past 12 months, playing a significant role in driving up the annual inflation rate.
When we exclude gasoline from the inflation calculations, the rate drops to 3.7%, down from 4.1% the previous month. Furthermore, grocery prices have been on the rise, but at a slower rate compared to previous periods. Year over year, the cost of filling up a grocery basket has increased by 5.8%, a significant decrease from the more than 11% increase observed at this time last year. This moderation is partly due to certain food items experiencing slower price increases and even declining prices for products such as bacon, bananas, grapes, and some types of cheese.
Implications for Canadians
Economists believe that the cooling of inflation could signal the conclusion of the Bank of Canada’s rate-hiking cycle. If inflation continues to decline, there may be no need for further interest rate hikes from the central bank. Andrew Grantham, a senior economist at CIBC Capital Markets, suggests that with economic activity slowing down in Q2 and Q3, excess demand appears to be waning. This could imply that inflation will continue to decelerate in the coming quarters without the necessity for additional rate hikes.
However, it’s not all smooth sailing. Canadians are now encountering new financial pressures due to higher interest rates. The central bank has raised its benchmark interest rate to five percent, a substantial increase from the 0.25 percent rate in March 2022 when the hiking cycle began. This means that Canadians may face higher borrowing costs for mortgages, loans, and credit cards.
Inflation is a multifaceted economic phenomenon with wide-reaching effects on people’s lives. While the softening of inflation rates may appear positive, it’s essential to consider the broader implications, especially in a time of increased expenses and a weakening economy. As Canadians grapple with heightened financial pressures due to higher interest rates, effective cash flow management becomes crucial for financial success.
At Cultivate + Evolve Financial, we empathize with the challenges that Canadians are currently experiencing. We are here to provide guidance on navigating the evolving financial landscape, discuss your options, and assist you in managing your finances effectively during these uncertain times. Whether it’s budgeting, investment strategies, or loan refinancing, we are your dedicated partners on your financial journey. Reach out to us today to explore how we can help you achieve your financial goals.