Inflation Rate in Canada Rising in February: So What?

Inflation statistics for Canada were released Tuesday morning, and the short story is: Inflation rates are rising in Canada. The …

Inflation statistics for Canada were released Tuesday morning, and the short story is: Inflation rates are rising in Canada.

The annual inflation rate rose to 1.1% in February from 1.0% in January. That means the rate of inflation is inching up, though the 1.1% reading was below the 1.3% rate that rate-watchers were expecting.

Last February, the annual rate came in at 0.9%, before falling into deflationary territory during March and April (thanks to the COVID-19 crisis). By late August, inflation climbed back into solid positive territory, but still at notably low rates.

Wait, why is this important?

Inflation is a key indicator that policy makers and economists watch and the rate of inflation impacts interest rates, both directly and indirectly. That means that everyday financial products from mortgages to credit cards can be affected by changes in inflation. Likewise, the stock market as a whole, and, in particular, bank stocks, can be impacted by changes in inflation.

In simple terms, the rate of inflation shows the rate at which prices are rising throughout the economy. Prices rising, but at a moderate rate — the Bank of Canada targets a midpoint of 2% per year in a 1% to 3% range — is generally seen as a good thing to keep the economy humming along.

But when prices start rising too fast, that’s not so good. High inflation is often described as “too much money chasing too few goods” and can make it tough for both consumers and businesses to buy the things they need. It also erodes the value of people’s savings. When inflation starts to rise, the Bank of Canada and banks in general, raise interest rates to encourage more savings and less borrowing and spending.

When inflation is too low, or turns negative (deflationary), it can also be a bad thing. In this case, consumers and businesses may not spend money because they expect prices to fall in the future. Businesses may not hire as much or give as many raises to workers — all of which can contribute to a slower-growing economy. That’s why when this happens — as has been the case in recent years — central banks cut interest rates to encourage borrowing and spending.

What now?

Between 2013 and 2020, inflation had been on a slow but steady rise, reaching above 2% by the beginning of 2020. The coronavirus pandemic changed that. Drastically lower consumer and business spending sent inflation plummeting in early 2020. The Bank of Canada responded by slashing interest rates.

But now inflation has started to pick back up as the economy is showing signs of life. Assuming the trend continues, we can expect higher rates from the BoC and banks around the country. While higher rates may not seem like a good thing, seeing them come back into a moderate, sustainable range is actually a positive for the Canadian economy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Bank Stocks

Confused person shrugging
Bank Stocks

Royal Bank vs. National Bank: Where Should You Park Your Investment Capital?

If we go by growth alone, it's easy to identify the top contender in the Canadian banking sector, but a…

Read more »

calculate and analyze stock
Bank Stocks

Is Canadian Imperial Bank of Commerce a Buy for its 4% Dividend Yield?

Besides its 4% annualized dividend yield, these top reasons make Canadian Imperial Bank stock really attractive for long-term investors right…

Read more »

ways to boost income
Bank Stocks

2 Undervalued Canadian Bank Stocks to Buy Now

These Big Six Banks offer growth potential and reliable dividend payments.

Read more »

Man holds Canadian dollars in differing amounts
Bank Stocks

Got $1,000? BNS Stock Can Turn it Into a Passive-Income Stream

Down more than 20% from all-time highs, Bank of Nova Scotia currently offers a tasty dividend yield of over 6%…

Read more »

dividend growth for passive income
Top TSX Stocks

1 Magnificent Canadian Stock Down 9 Percent to Buy and Hold Forever

There are some really great stocks on the market for any portfolio, but this one magnificent Canadian stock screams buy.

Read more »

Paper Canadian currency of various denominations
Bank Stocks

Is BNS Stock a Buy, Sell, or Hold for 2025?

Bank of Nova Scotia (TSX:BNS) is one of Canada's big bank stocks, but should you buy, sell or hold BNS…

Read more »

A worker uses a double monitor computer screen in an office.
Bank Stocks

Is BNS Stock a Buy for its Dividend Yield?

Bank of Nova Scotia is up nearly 30% in the past year. Are more gains on the way?

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Bank Stocks

Best Stock to Buy Right Now: TD Bank or Manulife Financial?

Manulife continues to see momentum in its business and stock price, while TD Bank stock remains down and out.

Read more »