Canadian Consumer Prices Make Biggest Decline Since The Inception of Index

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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  • Winnie The Pooh 4 months ago

    Inflation from devaluing loonies is all I expect in the meantime.

  • Hgbvv 4 months ago

    Let the real estate bubble pop, we all know its a huge bubble. Even if prices fall 30% we are just back to two years ago.

    Stop protecting speculators, people with one home really dont care if it falls in value.

    • Neo 4 months ago

      Prices need to get back to 2015. Heck, equity stocks got back to 2016 prices already. The home prices were never sustainable but definitely not in the environment moving forward.

  • Cory 4 months ago

    That’s only because of the oil delivery issue this week. It’s going to correct soon.

    • Ethan Wu 4 months ago

      These are March numbers. April would be in April’s numbers. So expect a bigger drop in CPI next month.

  • Marcel Forster 4 months ago

    Canada’s AAA credit rating is getting reviewed. More expensive debt is coming for all.

  • straw walker 4 months ago

    This begins the economic period when banks will no longer lend..Why should they at these rates and employment levels and with a sliding real estate market.
    Cash will again become king …. but no one has any…

  • DB 4 months ago

    Once this is over the reckoning will begin to take shape,,the govt’s will isolate the cost and increase taxes to pay for the relief they gave out. ouch this is going to hurt. Yes..I agree the gov’t should cut and run on those speculators who have caused housing to increase disproportionately to the rule of economics..There are very few average income earners who can afford to live in TO

  • Old Nick 4 months ago

    Well it is likely that home prices will deflate however so will the DOLLAR… The CAD $ will loose purchasing power while home price’s in large city’s i.e. Toronto/Vancouver/Calgary/Halifax will likely fall 20-40% and I feel that CONDO’S will become low income housing as people will no longer feel comfortable living in close proximity to each other after this health issue (not the mention the Air B&B market collapse).. As the $ collapse’s along with overvalued Real Estate the only place I believe that is safe to be at the moment is Gold people, check out the price is Canadian $ in the past 15 month it has increased 40+ % and is likely just beginning as the trajectory of Real Estate is nosediving along with several other expensive consumer good such as nice cars, motorcycles, boats and insert expensive items people can no longer afford due to unemployment…

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