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Canadians to Face Tough Months Ahead Due to Inflation and Interest Hikes

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As Canadians face two difficult challenges in rising inflation and the biggest interest hike seen in 24 years, an expert warns that prices will not come down anytime soon, according to a report.

Carleton University Economics Professor Vivek Dehejia said “some relief” might be in sight, but not a whole lot, and expects a “tough six months to a year for average Canadians.”

He said the pressure points that played a significant role in pushing inflation to a nearly 40-year high “are still in play,” namely ongoing supply chain disruptions, labor shortages, and the war in Ukraine, which is driving fuel and food prices up, with no end in sight.

The Bank of Canada increased its key interest rate by one percentage point last Wednesday as inflation in the country runs well over 7%.

In his opening statement Wednesday, Bank of Canada Governor Tiff Macklem acknowledged that “higher interest rates will add to the difficulties that Canadians are already facing with high inflation.”

However, he said the decision to front-load increases now is short-term pain necessary to bring inflation down for the long term.

“People are unsure of what they need to do to really get on top of this,” said Gursharon Singh, a credit counselor with Credit Canada.

She said traditional strategies like cutting expenses, money management, and extra sources of income might not be enough to help with the double issues of high-interest rates and inflation, especially since Canadians remain in debt.

“But finding ways to pay down principal balances of debt is imperative right now,” she said.

According to Statistics Canada, Canadians owe CA$1.83 in consumer debt for every dollar of household disposable income.

Canada has had several periods over the last 60 years where soaring inflation combined with aggressive interest rate hikes have led to a recession. However, CIBC Economist Katherine Judge doesn’t expect “a full-blown recession” this time.

Instead, she anticipates a few “below-potential quarters of GDP growth.”

“The environment is different today because central banks have much more credibility and transparency. Also, there have been decades of around 2% inflation for households and businesses to get used to and to help anchor inflation expectations,” she said.

Judge is not expecting a scenario where inflation expectations get to a level where the central bank has to hike interest rates so much that the economy goes into a deep recession.

The Bank of Canada said Wednesday that it expects to reach its inflation target of 2% by the end of 2024, with inflation easing to about 3% by the end of next year.

But if inflation stays higher for longer, the political and economic dynamic could shift, said University of Ottawa political science professor Jacqueline Best.

“We could start seeing more pushback from workers as they try to find a way to make up for declining real wages,” she said.

“At the present, we aren’t seeing much wage-push inflation, the way we saw in the 1970s and 1980s. Working Canadians just don’t have the same leverage to demand wage increases today that they did back then when we had much higher rates of unionization and cost of living clauses in many contracts.”

This article originally appeared on Advisor’s Edge.

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