Canadians still spending on travel, new cars despite red-hot inflation

Red-hot inflation is not stopping Canadians from spending on travel, new cars and home improvements as pent-up demand outweighs cost pressures, at least for now.

Red-hot inflation has Canadians opening their wallets wider at the grocery store and gas pump, but that’s not stopping them from also spending on travel, new cars and home improvements as pent-up demand outweighs cost pressures, at least for now.

Household consumption was the top contributor to Canada’s economic growth last year, according to official data, as consumers embarked on a historic spending spree. The Bank of Canada sees the binge continuing to drive the economy in 2022 even as it kicked off a tightening cycle this month.

But record mortgage debt and higher interest rates, coupled with the prices of everyday essentials rising at their fastest pace in three decades, risk putting a damper on all this spending, and that could curb economic growth.

Consumers, however, have shrugged off the spiraling prices so far and once again are ramping up their discretionary spending, according to interviews with retailers, car dealers, real estate agents and economists.

“Canadians have solid balance sheets, they’ve racked up ample savings and, for the most part, confidence is holding up,” said Rannella Billy-Ochieng’, an economist at RBC Economics.

RBC has pegged excess savings in Canada as a result of the COVID-19 pandemic at more than C$300 billion ($238.5 billion), enough to help consumers hedge against the rising cost of living, said Billy-Ochieng’.

The Bank of Canada expects Canadians to draw down roughly C$40 billion of those excess savings through the end of 2023. Consumer spending intentions hit their highest level on record in the fourth quarter of 2021, the central bank said.

The result will be a tsunami of consumer activity unleashed on the Canadian economy, assuming inflation – currently running at 5.7 per cent annually and set to go higher – is contained andgeopolitical tensions do not broaden.