Canadian Inflation Just Hit 7.7%: How? Why? What’s Next?
Statistics Canada just released their inflation stats for the month of May. The numbers came in higher than expected at 7.7%, the highest it’s been since 1983. It’s no secret that inflation is on the rise, a lot of the upward pressure on inflation is due to global factors that are out of Canada’s control. One of the main culprits is high gas prices caused mainly by the Russian & Ukraine war. Almost every business relies on gas to conduct business, so increased gas prices will lead to increased expenses for businesses, leading to increase pricing for products & services. Normally supply and demand will even out and people will stop purchasing certain products because of the higher prices, but, people have so much disposable income from the pandemic whether it’s from governments stimulus checks or people just staying at home and not spending their money that consumer spending is actually increasing.
When Will Rates Come Down?
I do still see rates coming down at some point in the next coming years, it was expected that the Bank of Canada was going to increase rates to try to bring down inflation, the question is how long will it take for us to start seeing the impact of these rate increases on the CPI.
As I have said before this is a hard question to answer because of external factors that are mostly out of our control, but hopefully, the issues with Russia and Ukraine can resolve in the coming years. That with the increases in rates in Canada will ease the pressure off of high inflation and bring supply and demand back to a pre-pandemic state.
What Will Happen If The Bank of Canada Keeps Raising Rates?
If the Bank of Canada keeps raising rates what could happen is that they will end up squeezing the demand out of the economy which would in turn lead to a recession. In the case of a recession, the Bank of Canada will decrease rates in an attempt to kick start the economy and boost consumer confidence. That is another reason why I’m not advising people to lock into a fixed rate, being stuck in a mortgage with a high penalty during a recession could put people in a sticky situation, especially if rates were to go down and you wanted to get access to lower rates. Being in a 5-year fixed-rate mortgage makes it hard to break your mortgage early because fixed-rate penalties are calculated differently from variable-rate mortgages, and most times the penalties are much higher.
If a recession does happen, I believe it will be short-term. Our economy isn’t necessarily struggling, the main issue is a supply shortage stemming from global issues like the war and lasting pandemic impacts. Once these issues get resolved, we should see supply and demand start to even out bringing down inflation. Some of my clients ask “when will this be”. I think we will start to see the turn happening by the end of 2023 or early 2024.
I hope this blog answered some of the concerns you may be having about the market and economy. If you have any questions, you can contact me at 519-250-4848, email me at [email protected], or fill out the form below.
