Are we going to be OK?

What is Inflation?

Inflation – is a term used to describe the rate at which prices for goods and services rise over time. It is a reduction in the value of your buying power, which means that a dollar effectively buys less than it did in prior periods. Inflation aims to measure the overall impact of price changes for a set of products and services, allowing for the increase in the price level of goods and services in an economy over a period of time. Inflation can be calculated by determining the current value of various goods and services consumed by households, this is referred to as a price index. This compares the value of the index over one period to another, such as month to month or year to year.

There are two main types of inflation: demand-pull inflation (when growing demand for goods or services meets insufficient supply, which drives prices higher), and cost-push inflation (demand for goods hasn’t changed, the price increases from production are passed onto consumers). Inflation is natural, and the Canadian government targets an annual inflation rate of 2%. However, inflation can be dangerous when it increases too much, too fast. Inflation makes items more expensive, especially if wages do not rise by the same amount, which will lead to a decline in purchasing power over time.

How does raising interest rates curb inflation?

When interest rates are raised, it can have several effects on the economy and personal finances. Here are some of the things that can happen

Positive effects:

• Higher interest rates can lead to higher returns on

savings accounts and other interest-bearing accounts

• Rising interest rates can make it more attractive for foreign investors to invest in the country, which can strengthen the value of the currency

 

Negative effects:

• Higher interest rates can make borrowing money more expensive, which can lead to lower demand for goods and services.
• When the cost of borrowing money increases, it can lead to a decrease in consumer demand, which can cause prices to fall.

Higher interest rates can lead to a decrease in the stock market, as returns are lower based in the interest on the rate of the investment through increased rates.

When interest rates rise, it also makes it more expensive for businesses to raise capital. Meaning they will have to pay higher interest rates on the bonds they issue. Making it more costly to raise capital which slows future growth on long term projects. 

Rising interest rates can make all debt more expensive, including mortgages, credit cards, and personal loans. 

When interest rates are raised. This will have a severe effects on personal finances and the of course the national debt. The federal government’s borrowing costs will also increase when interest rates rise. So, it is not in their best interest to raise the rates, this is done as a stop gap to slow things down and create a recession to lower the want for the public to spend. Which decreases demand and lowers inflation.

Higher interest rates will make it more expensive for individuals and businesses to borrow money for mortgages, personal loans. 

Credit card debt becomes increasing harder to pay off as there is not enough money left over from consumer goods costing more to pay down the debt effectively.

Overall, raising interest rates can make debt more expensive, which will have severe effects on personal finances. It leads to higher interest costs on the national debt, and make it more expensive for individuals and businesses to borrow money, which discourages borrowing and spending. This decrease in demand will cause prices to fall, which will help to reduce inflation.

What will be the result of a recession?

A recession is a significant, widespread, and prolonged downturn in economic activity. It will have several effects on the economy and personal finances.

• A recession is usually is associated with a decline of 2 percent in the countries economic output. 

• Recessions result in higher unemployment, lower incomes, and lost opportunities more generally.  Education, private capital investments, and economic opportunity are all likely to suffer in a recession.

• Economic output, employment, and consumer spending drop in a recession. Interest rates are also likely to decline as the Bank of Canada will cut rates to support the economy.

• Recessions can lead to reduced investment by companies, which will lead to slower economic growth and fewer job opportunities.

• Recessions can involve, a reduction in prices, especially of discretionary items and real estate. Liquidity will dry up, banks become less motivated to lend in recessions for fear of not being repaid.

• Interest rates tend to fall which creates the spend cycle once again.

Overall, a recession will lower the consumer spending rate and allow for inflation to lower to point where the interest rates can be lowered to keep the economy moving at a rate of growth which it can sustain. This is a very cyclical process but because there is so much time between these events that creates this imbalance, we tend to forget the process.

When will the Stock Market rebound?

The Canadian stock market has been experiencing some fluctuations recently, and it is difficult to predict when it will rebound. 

The break down…

The Toronto stock market rallied on May 26, 2023, helped by gains for financial and technology shares as well as signs of progress in U.S. debt ceiling debate.

The Canadian housing market appears to be on the road to recovery, but sales activity is expected to gradually grind lower through 2023 before rebounding.

The real estate market has experienced a downturn since March 2022, but it is expected to recover but higher interest rates will slow this down at this time. Once the interest rates start to come down the housing market will show a steady rebound.

The Canada Stock Market Index (TSX) is around the 20,450 mark on May 30, 2023 as the dollar eased from its sharp rebound and supported Canadian heavyweight resource-backed companies.

The Canadian stock market has been experiencing some fluctuations, and it is difficult to predict its future. Canadian small-cap (small companies equity positions but volatile because of their size – non blue chip) stocks should start to see a bid in late 2023, and many trade with very attractive valuations

The strength in the Canadian market will be driven by the financials and energy sectors as they stand to benefit the most from the coming economic environment, The TSX will enter bull market in the last half of 2023

The Canadian economy has been more resilient than feared in the wake of aggressive interest rate increases last year

Overall, the Canadian markets have experienced periods of economic uncertainty in the past, but the Canadian economy has been more resilient than feared. The Canadian stock market has experienced fluctuations in recent months, and it is difficult to predict its future. However, the Canadian markets have historically shown resilience and have the potential to recover from periods of economic uncertainty.