An extra C$8,300 ($6,600) in your pocket. That is roughly how much the average Canadian saved during the pandemic. The central bank is betting on C$40 billion in added spending through the end of the year as consumers draw down stockpiles. But soaring inflation has already offset two-thirds of the buying power of that excess cash. According to an estimate, some Canadians are dipping into pandemic savings to pay for everyday essentials, instead of a new paddleboard or a weekend getaway.
Royce Mendes, head of macro strategy at Desjardins Group, says “When I adjust for inflation, the extra purchasing power from excess savings has been eroded pretty significantly by higher prices. Paddleboards haven’t gone up two-thirds. But the price of everything you consume has gone up 7%.” he added.
Rising food and shelter costs drove Canada’s inflation rate to a three-decade high of 6.8% in April. The Bank of Canada responded with a 50-basis-point interest hike on Wednesday. Taking the benchmark rate to 1.5%, hinted at a more aggressive pace to come. It said stronger exports and robust consumer spending will fuel “solid” second-quarter growth.
Canadians saved an extra C$300 billion during the pandemic. Of that, some went into stocks, housing, and other investments. But roughly C$100 billion remains sitting in bank accounts just waiting to be spent. So far, spending is holding up against higher prices. Credit card outlays are running about 30% above 2019 levels, according to the RBC Consumer Spending Tracker.
Sohaib Shahid, director of economic innovation at the Conference Board, says, a combination of hot inflation fuels the pessimism. Also, the rising interest rates, and the uncertainty caused by Russia’s invasion of Ukraine. Although, higher-income households saved more than others during the pandemic and are far less sensitive to rising prices, said economists.
-Reuters.