Inflation and Rising Interest Rates Herald 'Tough' Months

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Inflation and rising interest rates point to “difficult” months

Traditional strategies, like cutting expenses, may not be enough, experts warn.

< p class="sc-v64krj-0 knjbxw">Inflation continued to rise in May, reaching 7.7% on an annual basis in Canada.

As Canadians grapple with runaway inflation and the biggest interest rate hike in 24 years, an expert warns prices won't be falling any time soon.

While Carleton University economics professor Vivek Dehejia may see some respite on the horizon, he expects between six and twelve months difficult for average Canadians.

According to him, the pressure points that played a big role in pushing inflation to a nearly 40-year high are still in play, namely sustained supply chain disruptions, labor shortages and the war in Ukraine. This is driving up fuel and food prices, and doesn't seem to be ending anytime soon.

The Bank of Canada raised its interest rate on Wednesday director by one percentage point, while inflation in the country is well over 7%.

In his opening statement on Wednesday, Bank of Canada Governor Tiff Macklem acknowledged that higher interest rates will add to the difficulties already caused by high inflation, but said that the decision to accelerate increases now was a necessary evil in the short term to lower inflation in the long term.

People don't know what x27;they have to do to really get the situation under control, observed Gursharon Singh, Credit Counselor at Credit Canada.

Traditional strategies like cutting expenses, managing money and finding additional sources of income might not be enough to deal with the double-edged sword of high interest rates and high interest rates. inflation, she explained, especially as Canadians remain in debt.

But finding ways to pay off the principal debt balance is imperative right now.

Canadian households must repay $1.83 of debt for every dollar of income. Real estate debt has particularly swelled over the past two years.

According to Statistics Canada, the debt of Canadian households means that they must repay $1.83 for every dollar of income.

Several periods over the past 60 years have saw soaring inflation combined with aggressive interest rate hikes lead to a recession, but CIBC economist Katherine Judge doesn't expect a real recession this time around.

Instead, it anticipates a few quarters of gross domestic product [GDP] growth below potential.

The environment is different today, because central banks have much more credibility and transparency. In addition, there have been decades of inflation of around 2% that households and businesses have grown accustomed to, which has helped anchor inflation expectations, she said. explained.

The Bank of Canada said Wednesday that it expects to hit its inflation target of 2% by the end of 2024, with inflation receding to around 3% from x27;by the end of next year.

But if inflation were to stay higher for longer than that, the political and economic dynamics could start to change , said Jacqueline Best, professor of political science at the University of Ottawa.

We may start to see more resistance from workers, who will try then to find a way to compensate for the decline in real wages, she argued.

Right now, we don't see much inflation by wages, as we saw in the 1970s and 1980s. Canadian workers simply do not have the same leverage to demand wage increases today as they did in the past. #x 27;time, when unionization rates were much higher and cost-of-living clauses were found in many contracts.

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