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Economic Concerns Arise as Canadian Inflation Soars to 4 Percent

The Consumer Price Index (CPI) in Canada has experienced a significant increase, rising to 4 percent annually by the end of August, compared to 3.3 percent in July. This spike in inflation is much higher than the June figure of 2.8 percent. Although these numbers may not indicate a rapid acceleration in inflation, there are still persistent price pressures despite government assurances that the target of under 2 percent would be met. In hindsight, the June figure of 2.8 percent was met with skepticism and was surpassed by the expected rise to 3.8 percent. The market was surprised by this increase, causing the Government of Canada 10-year yield to rise approximately 10 basis points and approach 3.9 percent. Food inflation continues to be a significant issue for Canadians, however, grocery prices fell 4 percent in August. The grocery component of the CPI, when measured annually, was 6.9 percent in August compared to 8.5 percent in July. Many food shoppers may dispute this figure, as there is evidence of Canadians opting for cheaper alternatives and avoiding high-end food markets. Dollarama’s stock price has increased by approximately 25 percent as individuals strive to stretch their incomes, which are not keeping pace with the rising cost of living.

The federal government has been under pressure to address Canada’s current economic challenges, as evidenced by the decline in popularity of the Liberal Party. As a response, they have engaged in symbolic meetings with senior executives of grocery chains, using the threat of new taxes. However, it is important to recognize that grocery executives do not have control over most input prices and cannot create money. The proposed taxes on grocery chains would either be an empty threat to appease voters or an additional tax burden, ultimately passed on to the consumer and worsening the current situation.

Mortgage costs have risen by 2.7 percent in August and a staggering 30.9 percent year over year. This will eventually have a serious impact on the economy as homeowners with mortgages will have significantly less disposable income. Banks have allowed many mortgage holders to defer principal payments and accumulate interest, leading to longer amortization periods that extend beyond their life expectancies. This is not a sustainable practice and weakens the banks’ balance sheets. When borrowers are unable to meet their obligations, mortgage values decline, similar to bonds. Fortunately, banks do not have to adjust the value of mortgages in arrears according to market fluctuations, but this affects their interest earnings. This situation also artificially maintains high home prices because homeowners are not forced to sell.

Rent increased by 7 percent in August and 6.5 percent annually, contradicting the notion that rents are skyrocketing to unaffordable levels. Although there are isolated instances of landlords imposing exorbitant rent hikes, this is not a widespread issue. The main problem in Canada is the lack of housing supply, and this will only be resolved when apartment builders are allowed to operate profitably. Unfortunately, it is unlikely that this will happen any time soon. Implementing a massive government-sponsored and subsidized push would only exacerbate the problem in the long term.

With oil prices on the rise, consumers and businesses will face additional pressure. The introduction of taxes, such as the carbon tax, will further increase prices and contribute to financial hardship. While these taxes may generate revenue for the government and enable more spending, they will ultimately weaken the economy, necessitating increased spending on social programs and reducing overall tax revenues. Serious economists and analysts generally agree that increasing taxes during an economic downturn is a misguided strategy, as emphasized by the lessons learned from the Great Depression. During the Reagan era, tax rates were reduced, leading to a thriving economy.

The recent CPI figure suggests a higher likelihood of the Bank of Canada continuing to raise interest rates, although it is possible that rates have already peaked. Importantly, with inflation staying between 3 percent and 5 percent, there is no immediate expectation of rate cuts. Both the Canadian and global economies are experiencing notable slowdowns, which should alleviate some of the price pressures. However, it is possible that we will have to endure higher inflation for a longer period than initially expected. The range of 3 percent to 5 percent may persist for several years. In the 1980s and early 1990s, inflation hovered around 4 percent, and people managed well after adapting to the previous range of 6 percent to 12 percent in the 1970s. Governments that have allowed inflation to surpass the 2 percent target may not currently have the means to reduce inflation without severe consequences for the economy. While the present situation may appear unfavorable, there is a possibility that it could worsen.

Please note that the views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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