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Debt-weary consumers take heart: Inflation dips, pay on rise, rates going nowhere

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Debt-weary Canadian consumers can take some solace: Hourly pay is on the rise, inflation is running at its tamest pace since the fall of 2009, and emergency low-interest rates promise to be with us for at least another year.

The annual rate of inflation fell in April to just 0.4 per cent, below what economists had expected and well down from the 1-per-cent of March, according to Statistics Canada data released Friday.

The April rate was the slowest since October, 2009. At the same time, the hourly earnings of permanent workers climbed 2.8 per cent from a year ago.

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Consumers may be struggling with record levels of household debt to disposable income, but the latest numbers should provide a boost to their buying power.

The April decline in inflation was due largely to a drop of 6 per cent in gasoline prices on a year-over-year basis. That, too, was the fastest decline since October, 2009, and followed a 0.3-per-cent dip in March.

Also helping were lower prices for passenger vehicles.

Core inflation, which excludes volatile items such as food and energy, and helps guide the Bank of Canada, slipped to 1.1 per cent from 1.4 per cent in March.

Weak inflation suggests there is little pressure on the Bank of Canada to raise its benchmark interest rate this year, even amid signs earlier this year of an economy that's bouncing back, CIBC World Markets said in a research note.

"The headline inflation rate marked a stark deceleration from the prior month's 1-per-cent pace, and is the lowest inflation rate since the recessionary period," it said.

The Bank of Canada said last month it doesn't expect inflation to hit its 2-per-cent target rate until mid-2015, and economists now expect the central bank will not boost its benchmark rate until late 2014 or early 2015.

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Also contributing to the reduction of the inflation rate in April was the death of the harmonized sales tax in British Columbia last month, said Bank of Montreal senior economist Robert Kavcic. B.C. prices fell 1.1 per cent in April.

Even Canada's "hottest economies" – Alberta and Saskatchewan – are seeing benign price trends, he said.

However, David Madani of Capital Economics warns that the happy confluence of a pickup in wages and falling inflation papers over some troubling issues.

He believes that household consumption over the first half of this year – and maybe beyond – won't come through to help boost economic growth the way it did in the second half of last year.

The "slowdown in household consumer credit growth certainly casts doubt about the current strength in household spending," he said in his weekly bulletin Friday.

"Indeed, it seems striking to us that consumer credit growth has slowed to rates not seen since the 1990s recession. Given this stark trend, we certainly do not expect consumption to outpace income growth going forward."

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He expects an uncertain global recovery, lower commodity prices and the housing market correction to crimp household income and spending growth going forward, and recommends that the central bank look at joining most of its peers in lowering interest rates.

In other highlights from the April inflation report, Mr. Kavcic pointed out that five of eight major categories saw seasonally adjusted price declines, four are at lower levels than a year ago and all are tracking below 2 per cent.

Excluding food and energy, prices are up just 0.5 per cent, the slowest pace since 1995, he said.

Statistics Canada also reported that transportation costs, excluding gasoline, fell 2.1 per cent in April.

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

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