Can Inflation Save Canada from Recession?

 By Mike Caggeso

Canada’s consumer price inflation rose 2.2% year-over-year in May, edging ahead as the Bank of Canada signaled it would last week. The spike suggests Canada’s economy of is also sputtering alongside that of the United States, but soaring commodities costs just may help our northern neighbor skirt recession. 

Inflation is up significantly from the 1.7% increase reported in April, Statistics Canada reported yesterday (Thursday). And high gas prices are to blame as fuel costs rose 15.0% in May compared with the same month last year - that’s considerably faster than the 12-month change of 11.6% posted in April.

Excluding gasoline prices, 12-month inflation grew 1.6% in May.

Last week, the central bank voted to keep its overnight interest rate at 3%, warning that inflation risks have “shifted slightly to the upside.” But the bank quickly followed that up by saying global demand for Canadian goods and services remains strong despite a U.S. slowdown.

“This report will not push the bank to raise rates in 2008, but we do see 100 basis points of hikes coming in 2009 as Canada’s inflation problem heats up,” Meny Grauman, an economist with CIBC World Markets Inc. in Toronto, said in a note to clients, Bloomberg News reported.

With an end to the rate cuts, the Canadian dollar is on the rise. The loonie has gained 1% since the June 10 decision to hold rates steady, Bloomberg reported.

Recession Protection?

Earlier this month, Canada announced its gross domestic product (GDP) shrank 0.1% in the first quarter, marking the country’s first decline since the second quarter of 2003.

But this is where inflation could actually be a friend.

In today’s world, where interest rates are low and commodity prices are high, Canada’s in a very strong position for two reasons:

• It has oil reserves - somewhat larger than the Middle East - in the form of the Athabasca oil sands.

• And it’s the world’s largest producer of uranium, with 25% of the world market.  (Australia is a close second, with about 23%.)

Since Canada is a chief oil exporter, its oil companies are on the receiving end of soaring prices. And in turn, that helps pad the economy’s pocket, becoming an unlikely protective barrier to another quarter of negative GDP growth.

Also working in the economy’s favor, month-to-month wholesale sales jumped 1.4% in April, more than doubling forecasts of 0.6%, Reuters reported. This suggests that domestic demand is able to wade through inflationary waters and lends credence to justifying a future interest rate hike.

The Bank of Canada’s next scheduled date for announcing the overnight rate target is July 15.

News and Related Story Links:

• Statistics Canada:
  Consumer Price Index

• Bloomberg:
  Canada Inflation Rate Rises More Than Forecast on Gas

• Bloomberg:
  Canada’s Dollar Gains for a Fourth Day as Inflation Accelerates

• Money Morning:
  Canada’s Negative GDP in the 1Q Doesn’t Spell Disaster 

• Reuters:
  Canada May wholesale trade up by 1.4 percent

Comments

[semar]

I don't know if Canada can be really saved by inflation, but I can the cad can certanly move lower on inflation. It seems the cad sentiment had change lately, especially after the hold decision from BoC

[francisschutte]

How can inflation save some country from recession? Further on I even read: "Excluding gasoline prices, 12-month inflation grew 1.6% in May". How can somebody define inflation without including all important factors? Goldonomic.com tries to define it all properly. However, unfortunately a lot of education is requested...Inflation or creating money out of thin air ALWAYS creates a recession and if done substancially always creates a depression. This is a basic economic law. It is the law of nature.

[User 151885]

Recessions are an effect resulting from the cause of cutting back. Let's take our cost of fuel. I paid $141.9 for a liter of gas last week on a trip from Toronto to Sault Ste Marie. On every road travelled there were fewer cars, hardly any trailers with boats and motors, no ATV's nor motor homes. If people aren't travelling, they aren't spending money. All they're doing is going for a walk in the park.
A GM truck plant is closing, home re-sales are slowing, new home starts are down except for multiples (and thats likely pre-approved condo projects contemplated and planned during the boom) and manufacturing jobs are shutting down due to our high dollar.
And yet Bay Street (our Wall Street) just keeps on talking up the markets while bank stocks decline. Banks lose money, go to market and get more capital then lose that new money also. Just as in the US of A.
So don't worry. Be happy. Canada is not going to have a recession, are we?

[User 151885]

oops! I put the dot in the wrong spot. It should be $1.419 per liter.

[Jim Mc]

Depends on the the balance of the flows - one part of the economy benefits from high oil prices - other parts suffer - unless the first outweighs the second, the macro economy suffers - in any case there is an re-allocation of purchasing power from one segment to the other (my gas price goes to you oil company) so Alberta may boom while Ontario sinks

[iThinkBig]

You got that right Francis. For mortgage securities, (NINJA loans probably a bigger problem for direct losses) and credit swaps, deravatives, it would take a thousand men and a supercomputer to pinpoint the amount of the spread between the original asset and the deravative. By the time we have done this the economy will be in depression.

The good news is that the U.S. has had big gains in communications technology and food output compared to the Great Depression meaning the country can recover in a few short years.

The bad news is the added crap the middle class particularly small businesses (49% GDP) will have to go through to rebuild jobs. We are getting no love or help from the banking system, investment community or government and are on our own against the predators from government or utilities. The rapid shocks of boom BUST economy are overwhelming the 49%.

Government had better rub peepies up there on the hill on subsidies for skilled job creation in the higher ed market and energy and RIGHT NOW. Bummer that this is an election year and interfering with creation of common sense policy until after the election (and then a quarter out from that when new people get in). For these reasons I speculate depression, no job creation floor (minus healthcare which I am in as a business and small bump in government jobs/defense spending) to cushion the freefall. T

That says to me a full contraction to -20 GDP in three year cumulative or the classic definition of depression. The wild card is Washington with rampant corruption and socialist momentum of politics so I make investment decisions based upon THAT.