Canadians are in a spending mood heading into summer. What that means for inflation – National |

For many, it is the first summer since the pandemic began that travel restrictions have eased and the world feels like it is opening up again.

So when it’s time to check out and the plane tickets are double what you budgeted for, do you cancel your plans?

Or do you just say whatever and click buy?

For Canadians weighing decades-high inflation against pent-up demand for travel and other experiences after years of pandemic lockdowns, the answer appears to be “buy now.”

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But a surge in demand for consumer spending could make efforts to bring rampant inflation back under control an even more uphill battle, experts say.

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TD Economics released a report this week tracking spending data ahead of the busy summer months.

Real spending rose 15 percent year-over-year in May, and TD suggested rising prices — inflation hit a nearly 40-year high of 7.7 percent that month — hadn’t yet dampened demand for the goods. consumers.

TD said spending has shifted from appetite for goods, as Canadians looked to buy things for their homes during the lockdown, to services, now that the weather is warming and their favorite experiences are opening up again.

Recreation and entertainment demand is leading the charge, with spending in this category 40 percent higher (on a nominal basis, meaning not adjusted for inflation) compared to pre-pandemic levels.

Leslie Preston, senior economist at TD, one of the report’s authors, tells Global News that after years of denying them the chance to go out and spend their money, Canadians are likely to be itching in the coming months to “scratch that itch”.

“I think there’s a lot of pent-up demand,” she says.

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Summer vacation costs rise sharply

Summer vacation costs rise sharply

“People made a lot of sacrifices during the two years of the pandemic, giving up a lot of kinds of experiences, getting together with friends. So I think there is a real appetite to resume those kinds of activities, although inflation may be a little bit higher than it was.”

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Patrick De Haan, an oil analyst at GasBuddy, told Global News earlier this week that he hasn’t seen record gasoline prices keep many Canadians from taking road trips, calling next summer an “abnormality.”

“Because COVID has shut down areas of the economy in the last two summers, Canadians are really itching to hit the road this summer, even in light of higher prices,” he said.

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Higher spending backed by pandemic savings

One of the factors offsetting the problem at the pumps and beyond is a significant level of savings that many households were able to accumulate in the past two years, says Stephen Brown, senior Canada economist at Capital Economics.

“If people haven’t taken a vacation in the last two years … they may be willing to spend some of what they saved last year on a vacation this year. And they may spend more than normal,” he tells Global News.

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But while those pandemic savings could help propel Canadians through a fun summer season, the ability to spend through red-hot inflation could undermine efforts to cool demand.

The Bank of Canada, like other central banks around the world, is firmly in the midst of a cycle of rising interest rates meant to take some of the steam out of the economy. By raising rates and raising the cost of borrowing, it seeks to discourage spending and reduce the demand that fuels inflation.

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Economy can handle more interest rate hikes, Bank of Canada governor says

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Canadians’ willingness to absorb higher costs amid high inflation complicates the calculations for the central bank as it plans further interest rate hikes, says Brown.

“It definitely makes the Bank of Canada’s job more difficult.”

Preston says that even as certain sectors of the economy see a relative increase in spending, a service-heavy summer might not be the end of the world for the Bank of Canada if other areas experience a recession.

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“You can see overall consumer spending slowing down, but you still see a shift in preferences from things like housing and goods to these more activities that were restricted during the pandemic, like a lot of entertainment and lifestyle activities. trip,” she says.

Despite a hot summer, TD projects that rising interest rates will start to kick in in the fall.

Preston says the typical slowdown in consumer spending declines could be exacerbated by rising mortgage payments and other economic pains that plague the average household.

“We think (inflation) could be a bit stubborn this year, but in 2023, we expect both headline and core inflation to slow. We are already seeing that the housing market is slowing down. That is going to filter through inflation,” she says.

Labor market tension due to summer demand

But increased spending on restaurants and hospitality getaways this summer could also hit an already strained job market, notes TD.

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Canada’s low unemployment rate already has businesses scrambling to fill shifts this summer. The Canadian Federation of Independent Businesses (CFIB) said in its latest Business Barometer report published Thursday that a shortage of skilled labor is a major factor limiting growth for half of the small businesses surveyed.

“Many companies are short-staffed. And sometimes Canadians can’t do all the activities they want because businesses don’t have enough staff to, say, run tours or have full capacity at a restaurant,” says Preston.

Respondents to the CFIB survey said they planned to increase wages by an average of 3.7 percent over the next year amid tough working conditions. Meanwhile, prices are expected to rise 4.4 percent.

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That will be a key factor for the Bank of Canada to watch as it seeks to rein in inflation expectations, says Brown.

If Canadians and businesses expect inflation to remain elevated in the long run, wage demands could rise to keep up. In turn, prices have to rise to cover those costs, leading to a possible vicious cycle of inflation.

As a result, Brown says he expects the central bank to remain “relatively aggressive” this fall, not just to make sure spending demand subsides after a potentially hot summer, but to send signals to businesses and consumers that wages will not have to rise. ad infinitum to keep pace with inflation.

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“I’ll probably continue (raising rates) into October just to make sure that you’re sure the conditions are in place for the economy to slow down and prices to come back down.”

Click to play video: 'Government Policy and Inflation in Canada'

Government policy and inflation in Canada

Government policy and inflation in Canada

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