Canadian Personal Finance Blog

As suspected the CPI for April is up, says Stats Canada. The rate for March year over year was 1.4% but for April year over year it is 1.7%, which seems to suggest the high price of gas is starting to make it through the system and is being reflected in consumer prices.

Gasoline was the main contributor to both the acceleration and the 12-month increase of the all-items index. Gasoline prices rose 11.6% between April 2007 and April 2008, compared with a 7.9% increase posted a month earlier.

There was no way higher gas prices was not going to start this kind of a cascade, and now the question is what is the Bank of Canada going to do about interest rates?

The interesting number I see is that food, the one commodity that I would have been positive was very affected by high gas prices only was up 1.2%, which seems odd (or maybe it just hasn’t gone through the system yet).

Stay tuned folks looks like a bumpy ride ahead!

Holy cow, interest rates dropped by 0.50% as set by the Bank of Canada, which means it is even easier to borrow money in Canada.

The recent price-level adjustments for automobiles and the effect of past changes in indirect taxes will keep measured inflation below target through 2008. The emergence of excess supply in the economy should keep downward pressure on inflation through 2009. Both core and total inflation are projected to move up to 2 per cent in 2010, as the economy moves back into balance. There are both upside and downside risks to the Bank’s new projection for inflation; these risks appear to be balanced.

In line with this outlook, some further monetary stimulus will likely be required to achieve the inflation target over the medium term. Given the cumulative reduction in the target for the overnight rate of 150 basis points since December, the timing of any further monetary stimulus will depend on the evolution of the global economy and domestic demand, and their impact on inflation in Canada.

Is this really a good thing?

Good Things about Interest Rate Cuts

Some things that are good about this bank rate cut (assuming the banks follow suit with this rate cut):

1. Your monthly payments will get lower if you have a variable rate of interest credit vehicle (e.g. Line of Credit or Secure Line of Credit). Should you lower your monthly payments? NO! Keep them at the level they currently are, and you start paying down this debt quicker. This is when you get more bang for your bucks!
2. Easier for businesses to borrow money, and thus more chance for expansion and maybe more jobs? Let’s hope that is the case.
3. The stock market looks more attractive an investment vehicle, as interest bearing investment vehicles now pay even less. You should start thinking about consulting with a professional or learn yourself about how to invest intelligently in the stock market (no you won’t learn that here).

Are there downsides to this?

Downsides of Lower Interest Rates

Could there be a downside to this? You bet!

1. Interest bearing investment vehicles which pay next to nothing, now pay even closer to nothing. Bonds and such become even less attractive to invest in. Folks on fixed income that are relying on these type of investments, now may have less disposable income. Maybe take your Grandma out for lunch?
2. People may think it’s a great time to borrow MORE money. Um, NO! If you have been holding off on a big purchase like a house, yes, you may have hit the jackpot here, however, if you are simply refinancing your credit card debt for the Nth time, think again!
3. Your credit card’s monthly interest rate will not be dropping. Isn’t that surprising? The interest rates go up when interest rates go up, however, they don’t drop when interest rates drop. Your pay day loan isn’t going to drop it’s credit rate either.
4. The Canadian dollar will drop in value against the American Dollar, which will translate to higher prices, especially for Gasoline (the root of all price evils).

We take a break from my discussions about money and it’s philosophical strengths and it’s abilities to disrupt lives, and we go back to some tangible real statistics.

Stats Canada has released the CPI Numbers for March 2008 and inflation’s growth dropped again year over year to 1.4% . This in theory means that everything you bought last year at this time, now costs 1.4% more than it did then, which is not true, and you should have a look at the tables at the end of this article which goes into far more detail by expenditure type.

This still boggles my imagination, given the price of gas and it’s continued rise (now $1.17 per liter here in Ottawa), but the Canadian dollar’s strength in the world may be buffering this effect.

We can see without energy costs included inflation is actually close to 1%, which is amazing, yet, we must also remember that this may change very quickly.

This should mean continued lower interest rates, as inflation is well under control, for now.

Inflation Graphs and Tables

OK, so I was wrong (again) the price of gasoline is not driving up prices in Canada, in fact the rate of increase in pricing is decreasing (which is to say, prices ARE going up, just not that fast). Stats Canada is now saying that the Consumer Price Index increased by 1.8% year over year for February 2008, which is astounding, given the price of gasoline.

The main reason seems to be the strength of the Canadian dollar and it’s effects on the prices of other mainstream products (the price of cars is actually dropping). Some highlights are:

• Energy prices were up 9.7% year over year, which is no surprise and this was the highest increase by area.
• Clothing and footwear actually dropped by 1.4% which is a reflection of a strong dollar.
• Shelter costs were up 4.1% and Services were up 3.5% which is interesting but all other areas had much smaller increases in prices.

An interesting point brought forward about Ontario in specific:

Ontario consumers experienced the fastest slowdown in consumer prices in the 12-month period to February 2008.Consumer prices rose 1.5% on average in Ontario during this period, compared with 2.1% in January. A slower rise in gasoline prices was mainly responsible for this loss of momentum. Pump prices rose only 14.8% in February, compared with 26.0% in January.

The 12-month growth in consumer prices was especially strong in Alberta (+3.5%) and Saskatchewan (+3.4%). British Columbia consumers experienced the most modest price gain (+1.1%). This is mainly a reflection of the smallest 12-month rise in gasoline prices (+11.3%).

I guess it wouldn’t surprise someone living in Fort McMurray to hear that it is expensive to live in Alberta?

Fed To Lower Another Rate

The Fed in the U.S. is talking about lowering yet another rate to attempt to alleviate the financial sense of despair and malaise in the U.S. economy. Soon, they may give you money to borrow money? No wait, that is how we ended up in this predicament.