Canadians got temporary price relief, but it could be a sign of more serious issues brewing. Statistics Canada (Stat Can) reported one of the largest declines in the history of the consumer price index (CPI) for March. The decline puts the index’ growth to one of the lowest levels in years. While low to no growth may be welcome from households, it could be an even further drag on credit growth.
Inflation Versus Deflation
Quick review of inflation and deflation for the folks that don’t use the terms daily. Inflation is when prices rise, and is caused by an increase in demand for goods and services. Supply shortages, economic booms leading to higher consumption – whatever the reason. Consumers will pay more, and inflation measures like CPI will rise. Generally, this is a good thing – as long as it’s low and stable like in the past few decades.
Deflation occurs when goods and services are in excess supply for the demand. The surplus can be because you’re making more relative to demand (computer equipment), in which case it can be a good thing. Or a sudden drop in demand because people can’t buy things due to unemployment – which is a bad thing. If the whole index is being dragged lower, it’s almost always a negative event. Not by itself, but due to the market mechanics that follow.
The Impact of Low or No Inflation On Credit
As inflation drops, consumers and lenders make important moves that impact credit. Households and businesses hold onto more reserves to prepare for a downturn, leading to a further drop in demand. They also have less incentive to spend, since they can expect more purchasing power tomorrow. This prolongs a recovery, and makes it harder for debtors to repay loans.
When prices and revenues drop, lenders scrutinize borrowers further. After all, companies are often making fewer dollars – and incomes will adjust. Since no one wants to lend a dollar to a borrower that may have a lower debt coverage soon, money becomes harder to borrow. Government programs can lower liquidity issues, but riskier lending dries up. That means an end to speculative investment, and more conservative lending – despite cheap credit.
Canadian CPI Makes Biggest Single Month Decline Since 2006
Canada’s CPI is making a historic move lower, with nothing like this seen in more than a decade. March CPI slowed from 2.2%, to just 0.9% compared to 12-months ago. The last time a deceleration like this occurred was in September 2006, when it dropped from 2.2% to 0.7%. Prior to that decline, one was made in April 2003, when CPI dropped to 4.2% to 2.9% due to the Iraq War, leading to lower oil prices.
Canadian CPI Makes Biggest Drop Since 2006
The 12-month change in Canada’s consumer price index.
Source: Statistics Canada, Better Dwelling.
Seasonally Adjusted, Canada Hasn’t Recorded This Before
On a seasonally adjusted basis, CPI made an unprecedented movement last month. CPI fell 0.9% in March when seasonally adjusted. Excluding food and energy, it increased just 0.1%. If we exclude everything, it’s unchanged. Stat Can said a decline of this size has not occurred in the history of the CPI index, going back to 1992.
CPI’s growth deceleration is almost entirely due to one basket component. The majority, 6 out of 8 major components, actually saw increases. Shelter, a big one, was actually up 1.9% from last year – substantial in contrast. The deceleration was almost entirely due to falling energy prices. Which can be looked at in one of two ways – you either think it’s temporary, global energy prices will be restored, and nothing else will be impacted. Or, other areas have yet to be impacted by the largest unemployment event in Canadian history.
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