Lower Inflation Data Will Help Tame Canadian Loonie

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Recent inflation trends suggest Canadian consumers can look forward to even better deals on big-ticket items such as cars and furniture in 2008. Yesterday, Statistics Canada released November inflation numbers and the core rate for the Consumer Price Index [CPI] showed a drop to 1.6%, continuing a downtrend that is expected to carry into coming months.

The expectation of further declines is based on retailers progressively replenishing their inventories of imports and import-competing goods at the lower prices afforded by the higher Canadian dollar of the past six months. In many cases, those lower acquisition costs should be passed onto consumers thanks to the pressures exerted by cross-border shoppers and competition among Canadian retailers themselves.

The downward tendency in inflation, as noted in previous blog entries (e.g. The sanctuary of government bonds), will also be heralded by economists. The latest core CPI reading came in below the Bank of Canada’s 2% midpoint in its target range for inflation, which gives the central bank leeway to lower its discount rate as soon as January. Along with moderating inflation, lower interest rates should give home and car owners some respite in the form of lower borrowing costs.

Lower inflation and interest rates also undermine the soaring loonie and should bring it back down to earth. Taking everything together, this makes it more likely that Canada’s economy can escape being dragged into a major slowdown by the ailing U.S. economy.

If there are any losers, it could be savers who experience falling returns on their savings accounts, GICs, term deposits, money market mutual funds, and other interest-bearing vehicles. Perhaps current returns should be locked in on a portion of those assets by extending maturities. For example, someone with a 90-day GIC coming due could switch part of it to a two-year GIC. Or they could even consider diversifying into the stock market.

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