Canadian Inflation Underperforms in July at 1.3 Per Cent

Canadian Inflation DropsCanadians are a little lighter in the pockets these days – and July saw lower-than-expected inflation growth as a result. Levels only rose by 1.3 per cent from 2011 numbers year-over-year – shy of the 2 per cent average aimed for by the Bank of Canada.

Canadians Show Spending Restraint

What does this mean for the average Canadian consumer? Well, for starters, they’re keeping their cash on a shorter leash. Blame for lower consumption can be pointed toward falling energy prices, high household debt levels, unemployment, exports shaken by a strong Canadian dollar and general global economic uncertainty ( EU unease strikes again).

Levels Are Looking To Stick Around

These low levels are expected to stay for the remainder of the year. In the Bank of Canada’s most recent Monetary Policy Report, released earlier this summer, 2012’s overall levels are expected to drop to 2.1 per cent from 2.4 in 2011. 2013 and 2014, however, are anticipated to see some growth with 2.3 and 2.5 per cent. According to a note made to investors and reported by the Canadian Press, Robert Kavcic of BMO Captial Markets says, “With core inflation running below target and external headwinds still blowing, we don’t expect the Bank of Canada to resume tightening until well into next year.”

Is This Good For Consumer Confidence?

The Bank of Canada hasn’t tweaked its historically low key lending rate since September 2010 – and with these inflation levels, analysts are sticking to forecasts that the rate won’t change until next year. That’s likely welcome news for those of you in variable rate mortgages.  According to the BoC, here are just a few benefits of sustained low inflation levels:

  • Confidence that strong purchasing power will stick around means investors, businesses and consumers can make long-range purchasing plans.
  • Low inflation results in lower interest rates (as illustrated by the BoC key interest rate) and encourages stimulating spending behaviour such as big ticket consumer items (houses, cars and appliances), and business investment.
  • Less need for speculative and high-risk investments as opposed to productive investments.
  • Avoiding the “vicious circle” of rising costs through consistent costs and wages.

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