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Bank of Canada

Inflation of the 1970s and Household Debt

Strategic Insights

— 1 min read

The current economic landscape is showing alarming signs, with growth stalling and Canadians struggling to cope with high borrowing costs. A CIBC economist is calling for a drastic 75 basis point rate cut, citing the crippling effect of current interest rates on the economy. This stance is echoed by other experts, including BMO's Robert Kavcic, who notes that Canadian retail sales are lagging behind the US, a significant contrast to the healthier US economy.

Key Takeaways:

  • CIBC economist Avery Shenfeld advocates for a 75 basis point rate cut, citing the significant impact of current interest rates on Canadian economic growth.
  • Robert Kavcic highlights the stark contrast between Canadian and US retail sales, with Canadian sales dropping by 2.7% year-over-year in September, compared to a 2.7% increase in the US.
  • The Bank of Canada's rate cuts may be limited by the Federal Reserve and loonie weakness, but a 75 bp cut would have significant benefits for REIT, utilities, and pipeline investors.
  • The economists at the CD Howe Institute's shadow central bank committee are overwhelmingly in favor of a 75 basis point rate cut, with only two members dissenting.
  • The abandonment of Bretton Woods, the end of balanced budgets, and oil price shocks are identified as key factors contributing to the 1970s inflation.
  • The thinking on what caused the 1970s inflation has changed significantly since the 2010s, with wage demands no longer being seen as a central cause.

Statistics:

  • The S&P/TSX Composite is up 23% so far this year.
  • Canadian retail sales ex-gasoline dropped 2.7% year-over-year in September.
  • US retail sales ex-gasoline rose 2.7% year-over-year in September.
  • Users of Ozempic and Wegovy, weight-loss drugs originally designed for diabetics, have seen significant reductions in opioid and alcohol addiction.
  • The new data with over 1.2 million subjects provides evidence of the effectiveness of these drugs in treating addiction.

Sources:

  • CIBC economist Avery Shenfeld in Basis points
  • BMO's weekly economics report by Robert Kavcic
  • CD Howe Institute's shadow central bank committee
  • Tyler Cowen and Alex Tabarrok's podcast

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