Canadians Struggle with Rising Prices as Retail Sales Decline Amid Inflation and High Interest Rates

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As a result of high inflation and interest rates, Canadians consumers are reducing their expenditure, which is having a negative impact on retail sales. In February, retail sales decreased 0.2% to $66.3 billion as consumers reduced spending at department stores and petrol stations. Estimates for March indicate a further decline of 1.4%, indicating that Canadian consumers are becoming more prudent. According to retail analyst Bruce Winder, Canadian consumers are “beginning to tighten their belts.”

Increasing interest rates influence consumer spending.

Economists have warned about the impact of the lag between rising prices and elevated interest rates on the economy. At its most recent rate decision, the Bank of Canada maintained its key lending rate at 4.50%, up from 0.25% at the beginning of 2022. The rapid increase in interest rates has had an effect on consumer spending behaviour, despite the fact that the economy has generally exceeded expectations. Andrew Grantham, senior economist at CIBC Capital Markets, stated in a client note that the sudden increase in interest rates has affected consumer spending behaviour.

Slowing consumer spending helps reduce inflation.

Despite the decline in consumer expenditure, this may aid in reducing inflation. The annual inflation rate in Canada fell to 4.3% in March, while grocery prices increased 9.7% year-over-year. However, declining retail sales could help keep goods price inflation in check, enabling the Bank of Canada to maintain its current monetary policy for the remainder of the year. This would occur prior to the beginning of gradual cutbacks in 2024, according to Grantham.

Performance of Retail Subsector Sales

February saw declines in four of the nine retail subsectors. For the month, sales at petrol stations and petroleum vendors fell 5.0%, while sales at general merchandise retailers fell 1.6%. In February, sales at auto components and vehicle dealers rose 0.9%. Excluding petrol stations and fuel vendors and automobile and components dealers, core retail sales increased by 0.1%. Retailers of apparel, apparel accessories, footwear, jewellery, luggage, and leather products experienced a 4.4% increase in revenue. Consumers are selecting and choosing where to reduce their spending, and more companies are encouraging employees to return to the office, which is boosting spending in some areas.

As a result of high inflation and interest rates, Canadian consumers are becoming more prudent in their spending habits. February retail sales decreased, and early estimates indicate a steeper decline in March. Despite this, a decrease in consumer expenditure could help reduce inflation, allowing the Bank of Canada to maintain its status quo until the beginning of 2024, when gradual rate cuts will commence. Consumers are selectively reducing their spending, and an increasing number of employers are encouraging employees to return to the office, which is boosting spending in some areas.

source: ©Roberto Machado Noa/LightRocket via Getty Images
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