Inflation

Author: Paradigm Business Plans |

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We have been experiencing a high inflation rate after COVID 19 global pandemic with constantly increasing the cost of food, gas, labour, raw materials, and services. Families’ disposable money has been diminished to a level that low-income people suffer tremendously and the rest had to cut their trips, vacations, and some other expenses to balance their budget. Inflation, in many respects, has become the word of the year as economists, politicians and everyday Canadians struggled to come to grips with the surging costs of everything.

Bank of Canada has changed its interest rate policy multiple times for the last 12 months to tame the inflation rate. The Consumer Price Index (CPI) is an indicator of changes in consumer prices experienced by Canadians. It is obtained by comparing, over time, the cost of a fixed basket of goods and services purchased by consumers. The CPI is widely used as an indicator of the change in the general level of consumer prices or the rate of inflation. Since the purchasing power of money is affected by changes in prices, the CPI is useful to virtually all Canadians. The CPI is reported monthly to track the inflation for the previous month. The latest CPI report was for the month March that CPI reduced from 5.2% in February to 4.3% in March. This 17.3% reduction in the CPI confirms the down trend inflation as depicted in the following figure.

CPI vs Prime Interest Rate Chart

Increasing the prime interest rate has created the cost of borrowing more expensive that consumers think more about their spending. Buying houses, cars and other big-ticket items was influenced by the increased interest rate. It is expected the downward pressure of the interest rate will continue to reduce the CPI in the coming months. However, there is a limit for keeping the interest rate high as the small businesses are facing increased borrowing costs putting off their growth projects implementation.

Overall, the economy cannot afford high interest rates for ever. Some policy changes are expected along the way in the coming months. Although it is too soon to say what will happen to the policy interest rate in the next announcement (June 7th, 2023), the CPI values for the months April and May are determining factors for changes in the interest rate policy change. If the Bank of Canada keeps the policy interest rate unchanged in June and July, then September is expected to lower the interest rate assuming the CPI continues its downtrend. It is imperative for all of us to keep an eye on the data to find how close the Bank of Canada will be in changing its policy interest rate.



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