Inflation is on a Good Path

Statistics Canada released inflation numbers for January this week. And for a change, inflation surprised us in a good way. Coming in at 5.9% (versus the expected 6.1%) the downward trend of inflation continued which takes some pressure off the Bank of Canada (BoC) for their upcoming March 8th meeting. Which should be good news....but....

 January saw Canada add 150,000 jobs. Similarly, the US jobs report was stronger than anticipated and their inflation statistics were the opposite kind of surprise: they came in higher than anticipated. Muddied waters much? What we have are conflicting data points plus sensational headlines which adds up to confused consumers.

Canada is....Different

Right now, I'm hearing a lot of this: "I read that we're going to have to increase rates a lot more from here." But most of these headlines and articles are from American media. And since we all know the saying: "When the US sneezes, Canada catches a cold" we naturally assume that as the US goes, so too do we. But there are some major differences between our economies that will lead us down slightly different paths going forward (The Globe and Mail article here).

Remember the Sub Prime Crash financial crisis of 2008? Heck - they made a movie about it. Aside from the mess it made around the globe, it resulted in a massive de-leveraging of American borrowers. Default rates skyrocketed, banks failed and mortgages were wiped off the books. And while the US sneezed (and sneezed hard), we didn't quite catch that cold in the same way. Yes, it was a tough time and our defaults rose - but not by nearly as much. Not even close. And since our mortgage loans in Canada are recourse loans (meaning banks can come after you personally - not just your home if you are unable to pay), mailing in your keys and walking away from your house just wasn't an option. 

All this to say that yeah - it was bad here. But what we in Canada got were much more strict mortgage rules and the byproduct of an American recession without the de-leveraging. And what that means is that we in Canada are more leveraged (higher debt) than our American neighbours and therefore more naturally more sensitive to these rate hikes. And so the BoC will not have to raise rates as high as the US Fed to achieve the same result. Not to mention - we started our rate hikes here earlier which will have us see our end point sooner. And we can see the markets reflecting this with the value of our dollar.

The Missing Ingredient: Time 

The BoC was the first central bank to acknowledge a conditional pause. Most (perhaps all) of the heavy lifting on the policy side has been done. So barring the accumulation of evidence in Canada to justify further rate hikes - we're most likely just riding this out and letting these higher rates do their thing. It's just going to take some time. That isn't to say that the BoC won't remain vigilant. Heck - this week they called out businesses for using inflation as camouflage for raising prices and padding profits (CBC article here) threatening further rate hikes as a consequence. I suspect that's more likely an effort to raise consumer awareness than it is a likely outcome. 

The bottom line here is that we are in a period of very high sensitivity. We are nearing the anniversary of our first rate hike and the resultant stress (both emotional and financial) has certainly taken it's toll on our collective psyche. And like I talked about before, we will remain overly cautious and reactive until we're sure the threat is behind us. And objectively, that day is getting closer and the data is getting better - not worse. And right now, I'll take any good news I can get!

What to do

Plan. Prepare. Discuss. We're in this for a little while yet. And while it's hard to not worry about the future, it's better to take action if there is fear or anxiety on the horizon. If you have gone from "this sucks but I'm fine" to "I need to look at some options because this isn't fine", reach out. Let's have a chat about your options and let's put a plan in place to help. That's what we're here for.

And as we're always trying to grow the number of people we help, please pass this on or connect us with a friend! We're always happy to make new friends!