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Canadians are in a spending mood heading into summer. What that means for inflation

Click to play video: 'How to make a summer budget' How to make a summer budget
Summer is finally here, but it has come with an unwelcome surprise. Inflation and interest rates are driving the cost of everything up, meaning that vacation you planned in January just got a lot more expensive. For tips on how to stick to a budget this summer, Rubina Ahmed-Haq joins Candace Daniel and Antony Robart – Jun 30, 2022

For many, it’s the first summer since the pandemic started that travel restrictions have dropped and the world feels like it’s opening up again.

So when it comes time to check out and the plane tickets are twice as expensive as you had budgeted, do you cancel the plans?

Or do you just say whatever and click buy?

For Canadians weighing decades-high inflation with pent-up demand for travel and other experiences after years of pandemic lockdowns, the answer seems to be landing on “buy now.”

Read more: Searing hot inflation could shift Canada Day BBQs to ‘hotdogs instead of steaks’

But a surge in demand for consumer spending could make efforts to bring rampant inflation back into line even more of an uphill battle, experts say.

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TD Economics put out a report this week tracking spending data leading into the busy summer months.

Real spending was up 15 per cent year-over-year in May, with TD suggesting that surging prices — inflation hit a nearly 40-year high of 7.7 per cent that month — had yet to take a bite out of consumer demand.

TD said that spending has shifted from an appetite for goods, as Canadians sought to buy stuff for their homes during lockdown, to services, now that the weather is warming and their favourite experiences are opening back up.

Demand for recreation and entertainment is leading the charge, with spending in this category 40 per cent higher (on a nominal basis, meaning not adjusted for inflation) compared with pre-pandemic levels.

TD senior economist Leslie Preston, one of the report’s authors, tells Global News that after years of being denied the chance to go out and spend their money, the next few months will likely see Canadians keen to “scratch that itch.”

“I do think there’s a lot of pent-up demand,” she says.

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“People made a lot of sacrifices for the two years of the pandemic, foregoing many types of experiences, getting together with friends. So I think there is a real appetite to sort of resume those kinds of activities, even though inflation may be quite a bit higher than it was.”

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Patrick De Haan, a petroleum analyst with GasBuddy, told Global News earlier this week that he hasn’t seen record-high gas prices holding many Canadians back from taking road trips, calling the coming summer an “abnormality.”

“Because of COVID shutting down areas of the economy the last two summers, Canadians are really itching to hit the road this summer, even in light of higher prices,” he said.

Read more: Nearly 7 in 10 drivers worry they can’t afford gas as prices soar, poll finds

Higher spending supported by pandemic savings

One of the factors offsetting the pinch at the pumps and beyond is a significant level of savings many households were able to accrue over the past two years, says Stephen Brown, senior Canada economist at Capital Economics.

“If people haven’t taken a holiday for the last two years … maybe they’re willing to spend some of what they saved from last year on a holiday this year. And they may spend more than they would usually,” he tells Global News.

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But while those pandemic nest eggs could help push Canadians through a fun summer season, the capacity to spend through red-hot inflation could weaken efforts to cool demand.

The Bank of Canada, like other central banks around the world, is firmly in the midst of an interest rate hiking cycle aimed at taking some steam out of the economy. By raising rates and increasing the cost of borrowing, it looks to discourage spending and reduce demand fueling inflation.

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The willingness of Canadians to absorb higher costs amid high inflation complicates calculations for the central bank as it plans further interest rate hikes, Brown says.

“It definitely makes the Bank of Canada’s job harder.”

Preston says that even as certain sectors of the economy see a relative ramp up in spending, a services-heavy summer might not be the end of the world for the Bank of Canada if other areas see a downturn.

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“You can see overall consumer spending slow, but still see a shift in preferences away from things like housing and goods towards these more activities that were constrained during the pandemic, like many entertainment and travel-type activities,” she says.

Despite a hot summer, TD projects that rising interest rates will start to bite come the fall.

Preston says typical fall slowdowns in consumer spending could be exacerbated by rising mortgage payments and other economic pains hitting the average household.

“We think (inflation) could be a bit stubborn this year, but in 2023, we do expect both headline and core inflation to slow. We’re already seeing the housing market slowing. That’s going to filter through to inflation,” she says.

Labour market straining under summer demand

But the increase in spending at restaurants and hospitality getaways this summer could also affect an already strained job market, TD notes.

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Canada’s low unemployment rate already has businesses struggling to fill shifts this summer. The Canadian Federation of Independent Businesses (CFIB) said in its latest Business Barometer report released Thursday that skilled labour shortage is a significant factor limiting growth for half of small businesses surveyed.

“A lot of businesses are short staffed. And sometimes Canadians aren’t able to do all the activities they want to do because businesses don’t have enough staff to say run tours or have full capacity at a restaurant,” Preston says.

Respondents to the CFIB survey said they planned to raise wages an average of 3.7 per cent over the next year amid the tight labour conditions. Prices are meanwhile expected to rise 4.4 per cent.

Read more: Federal spending does fuel inflation, but it’s worth the hit: Desjardins

That’s going to be a key factor for the Bank of Canada to watch as it looks to rein in inflation expectations, Brown says.

If Canadians and businesses expect inflation will remain elevated in the long run, wage demands could rise to keep up. In turn, prices have to rise to cover those costs, leading to a possible vicious cycle of inflation.

As a result, Brown says he expects the central bank will remain “relatively hawkish” this fall — not only to make sure spending demand dampens after a potentially hot summer, but to send signals to businesses and consumers that wages won’t need to rise ad infinitum to keep pace with inflation.

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“I will probably continue to (raise rates) until October just to make sure it’s confident that the conditions are in place for the economy slowing and prices to come down again.”

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