Consumer Behaviour Setting Stage for Inflation in Canada
As the world economy continues to resurface from the grasps of the pandemic, the impacts of inflation is being witnessed in Canada. Will this be persistent? The coronavirus pandemic was nothing short of a monkey wrench on the world’s economy. Not only did it shatter many countries’ backbone, it also messed with the concepts of consumer behaviour. One aspect that remains unaltered is the loose monetary policy, and the pandemic appeared to be a convenient mechanism to increase the pace of said behaviour.
source: tradingeconomics.com
Other weird anomalies such as a boom in home baking and rise in online shopping behaviour caused analysts to recalculate how the economy will emerge after this pandemic. Even though the current financial year of Canada is running a deficit that would be more than enough to pay for the country’s contribution to WWII, it is still going to crash head forward into inflation. According to CIBC analysis, the Canadians are hoarding cash now more than ever, which amounts up to a total of more than $90 billion in excess cash.
A new report by CIBC on Tuesday estimates that Canadians are sitting atop $90 billion in excess cash — easily the highest in the country’s history and equal to about four per cent of consumer spending. Canadian businesses, the report said, are hoarding another $80 billion. The savings rate in the second quarter of 2020 surged to 28.2 per cent, up from 3.6 per cent before the COVID-19 pandemic struck.
The growing cash hoard points to the steep decline in consumer spending that’s typical of recessions, but also raises questions about the efficacy of COVID-19 relief programs rolled out by Prime Minister Justin Trudeau, who has sought to cushion households and small businesses against the economic lockdown from the pandemic.
One of the reasons this could be happening is that the investors fear the Canadian dollar will be devalued and when that happens, they want nothing to jeopardize their profits.
COVID-19 dropped a bomb on our usual understanding of consumer behaviour, spurring endless weird anomalies like a steep rise in alcohol sales, a boom in home baking and a run on sex toys, among others. If there was ever a time to be skeptical of the CPI’s forecasting powers, it’s probably now.
Governments have been utterly blowing out their spending
In the current financial year, Canada is running up a deficit that could have singularly paid for the country’s entire contribution to the Second World War. Running up a $55 billion deficit at the height of the Great Recession was considered extreme, and we just septupled that without blinking.
Why is Inflation Hitting Canada like a Storm?
In March 2021 alone, the annual inflation rate in Canada doubled to 2.2% from 1.1% in the period of one month. The Central Bank is of the opinion that it would take Canada a year at least to return this inflation rate to 2%. However, according to some analysts, higher commodity prices and the downturn of economy because of Covid-19 could cause the inflation rate to increase up to 3% even. These signs show that there are underlying inflationary pressures in the Canadian economy which may also cause inflation to go higher.
There has been a general increase in the consumer prices in April 2021, which was the sharpest increase in prices since last year’s June. Inflation was calculated at 3.4% in April which is the highest ever since the last 10 years.
This continued into May, where inflation accelerated to 3.6%. All this while certain regions haven’t even fully re-opened yet.
Inflation in Canada in May accelerated at its fastest pace in a decade for a second month in a row, driven by surging shelter and vehicle prices, as the impact of the statistical comparison to tanking prices last year eased, data showed on Wednesday.
Canada’s annual inflation rate accelerated to 3.6%, from 3.4% in April, Statistics Canada said. That was slightly ahead of analyst expectations that the annual rate would rise to 3.5%.
Royce Mendes, CIBC World Markets’ senior economist expressed his views on these readings as
“Supply constraints and the varied timing of recovery in demand across categories is creating more volatility than we had expected. This is likely to continue, particularly if the Canadian economy sees price pressures as it reopens similar to those in the US. However, it’s still likely that this will all end up being transitory, and the Bank of Canada will be able to stick with its plan of keeping rates on hold until the latter half of 2022.”
Lumber prices are beating yearly records, grocery prices are rising higher than ever and gasoline is spiking up in value.
If we take a look at the shipping sector alone, there is a tremendous increase in transportation costs alone, which impacts the import and export of goods, thus setting the economy back by multiple paces. There are multiple factors contributing to this outcome, some of which are higher labour costs, higher freight costs, more transportation demand, more demand of product categories along with shortages of chips, containers, delays in ports and also the chemical supplies.
“And with regard to containers and shipping, transportation costs have increased as well. This will continue — the feeling is that this will continue for the most part of this calendar year,” warned Costco CFO Richard Galanti on the company’s latest earnings call.
One of the core reasons that Canada is bound to fall into inflation is far greater fiscal and monetary policy response. The second factor can be attributed to potential GDP growth, which is lower at this time of the year. The pandemic took a huge toll on the supply chains and left its marks on the labour supply which may also add up to the challenge of inflation Canada currently faces.
How can Investors Profit from this?
Inflationary indicators are bullish for precious metal prices. It continues to make gold, silver, platinum and palladium excellent hedges. As a result, it is a given that the metal prices will shoot to the skies and so will the stock prices for mining companies. In order to hedge against inflation, it is the perfect time for investors to invest in precious metals or Canadian mining penny stocks. Not only is it great for diversifying the portfolio but increased returns are a given for investors as inflation increases.
We remain bullish on Etruscus Resources. The upside potential on ETR is incredible, with an active summer exploration program at the ready. The company recently increased the size of their private placement from $1.5M to $2.7M. The company hosts substansial high-grade Silver, Gold, Copper, Lead and Zinc and its neighbouring peers increase in value on average over 310% over the past 1 year. You can read our full reports, and summary on ETR here.
Another stock we are very bullish on is Nexus Gold (NXS). NXS has a portfolio of assets spread across Canada and West Africa. The company has recently completed the reconnaisance program at Manzour-Dayere after having announced a incredible results from their Dakouli 2 drill program including: 10.87 grams-per-tonne (“g/t”) gold (“Au”) over 4 meters and 15.10 g/t Au over 1m, and 17.00 g/t Au over 1m. When compared to peers in West Africa and Red Lake, Ontario, NXS is the cheapest by market cap at current valuation. The upside is immense here, as the sheer scale of their assets lends them the opportunity for substantial price appreciation. We estimate the stock to be worth at least $0.24, however it’s only trading at $0.05. You can read our full report on NXS here.