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Complain about inflation, but spend as before



Not a day goes by without hearing about the harmful consequences of inflation, rising interest rates and the price of butter on household budgets. The subject even invites itself to our family dinners, to meetings with friends. No doubt, one might think, it is financially difficult for the vast majority of us. Except that…

Except that in general, the economic context has not transformed us into fervent followers of voluntary simplicity. On the contrary, the demand for small and large luxuries, such as dining out and traveling abroad, is increasing, the Royal Bank told us last week.

The financial institution closely monitors consumers’ discretionary spending, that which is not necessary for life. His observation is clear and clear: there is “no slowdown” at present. Mainly thanks to the demand for services.

Even though the price of airline tickets has jumped 28% from pre-pandemic levels, Canadians continue to put travel at the top of their priority list and increase their spending in this budget line.

“We complain about prices, but we still buy plane tickets because we want to travel. This is really an area where consumers are responsible for inflation by not reducing their spending,” the study’s author, economist Carrie Freestone, who works for the Royal Bank in Toronto, told me.

As for the restaurants, they welcome more customers than before the pandemic. Between 5 and 7% more, systematically, every month without exception, for a year. “The interest rate hike has not yet had an impact on discretionary spending. It’s very unique. Normally, people should feel financially tight and curb their consumption,” Carrie Freestone wonders.

Admittedly, we no longer fill our grocery basket as before. We trade a vegetable for another cheaper one, we favor house brands, we look more at advertising books. And for some low-income households, coping with inflation has become an extreme sport. The last year has not been easy for everyone, we must be aware of this and sympathize.

But it is clear that the Bank of Canada’s strategy of raising the key rate to slow consumption and therefore inflation is not yielding results very quickly.

Many phenomena can explain this apparent inconsistency between the ambient depressed discourse and the expenses in reality.

First, the labor market remains strong, with an unemployment rate in the country at 5%, and 4.1% in Quebec, a hair’s breadth from the record low of 3.9% reached in January. With a job, we feel less urgent to cut into the pleasures of life. In addition, wages are rising and governments have distributed various gifts (amounts of $400 to $600 in December, housing assistance for seniors), which has increased disposable income in recent months.

Not to mention that many households still have COVID-19 savings at their disposal, after spending two years spending less. It won’t last forever, but for now, the kitty provides some nice wiggle room. There is a whole psychological aspect as well. After the deprivations, what could be more therapeutic and satisfying for the morale than a “revenge expenditure”? “Because I’m worth it,” as the ad said.

No matter how much we talk about interest rate hikes, not everyone suffers the consequences.

In Canada, only 35% of households have a mortgage. “The ideal would be for monetary policy to affect everyone in the same way, but rate increases disproportionately affect households (10%) who have a variable rate,” explains Matthieu Arseneau, Deputy Chief Economist at the National Bank. For now, especially, because as homeowners renew their loan, they will have less money to put elsewhere…

In a few months, consumption should therefore stabilize despite all our irrepressible desires. Because the portion of disposable household income needed to service the debt (mortgage, credit cards, car loan) should reach “a record level” of 15.2% in the second quarter, predicts Carrie Freestone. When such a large part of your pay goes to interest, you have to adjust your budget.

In other words, big gray clouds are coming to obscure the last bits of blue sky.

Already, there is a “sharp increase” in the number of people carrying a balance on their credit card from month to month. In Canada, this is the case for 7 million people (+ 5.9% compared to 2021) while 1.22 million Quebecers are in this situation (+ 1.2%), according to Equifax. This is a clear sign of financial stress.

The average balance on our Visa and Mastercard remains lower than before the pandemic. It’s encouraging. But for how long ? Non-mortgage debt continues to soar because consumers do what society expects of them: they consume. In doing so, they damage their financial health while watering the breeding ground of inflation.

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