Below, is an excellent article that has just been published by CIBC World Markets.  The best quote is:

“…Canada’s inflation rate will be no threat to the Bank easily fulfilling its pledge to keep interest rates at a slim quarter point through mid-2010. In fact, market expectations for rate hikes in the first half of 2010 could be a full year too premature.”
This is quite a pertinent take on the effects of inflation on rates since a there has been a lot of speculation that it would indeed be inflation that would edge rates up significantly.

Herewith, the article:
TORONTO, Aug. 25 /CNW/ - CIBC (CM: TSX; NYSE) - The recession in Canada and the U.S. may be over, but the damage it left behind means Canadian growth and inflation will be muted next year, keeping Bank of Canada interest rate hikes on the sidelines until 2011, notes a new report from CIBC World Markets.

“While the 2009 recession may already be over, the slack it created is both large and likely to persist,” says CIBC’s Chief Economist Avery Shenfeld.  “Unlike the Bank of Canada, we don’t expect growth to average above the non-inflationary potential until 2011. But even under Governor Carney’s more optimistic trajectory, inflation will still be feeling the downward pressure of a sizeable output gap next year, one as large as we saw in the early 1980s and 1990s downturns.”

Mr. Shenfeld finds that while the core inflation rate did not decelerate as much as the Bank of Canada predicted earlier this year, there are reasons to expect a further easing in core inflation ahead. “A look at the underlying components for headline and core inflation helps identify what has, in our view temporarily, prevented core inflation from easing much thus far. And part of the answer lies in what economists call, the “income effect.”

He notes that by stripping out volatile items from the CPI, the Bank of Canada’s core measure now excludes most of the items that have been deflating, much more so than in the “old” core measure that simply left out all food and energy prices. With the “volatile” measures included, headline CPI is negative, largely driven by the dive in gasoline prices from a year ago. Lower gas prices have pulled down costs for intercity transportation fares as well, which the Bank of Canada also excludes from core inflation. Other non-core items such as natural gas, fuel oil and mortgage interest costs have also eased off.

“The deep dive in non-core items, has left those Canadians still working with some spending power,” adds Mr. Shenfeld. “While nominal wages have begun to decelerate in a slack labour market, a negative year-on-year inflation rate has meant that in real terms, the buying power of the average wage has escalated. So after filling their gas tank and paying their new, lower, mortgage bills, Canadians simply have more money in their pockets when they go shopping for other items, keeping those prices aloft.”

Mr. Shenfeld notes that economic slack usually takes time in exerting its disinflationary force. Given that wages get adjusted only as contracts come up and that some prices are fixed ahead of time (as is the case for catalogues), he believes the upward pressure on prices will ease in the coming months.

“Headline inflation rates won’t be as benign as they have been,” says Mr. Shenfeld. “If crude oil hugs the $60-70 range, energy will revert from a huge negative contributor to CPI to a modest positive in early 2010, with spillovers into related products like airline fares. But by reversing the “income effects” noted above, that implies diminished buying power for other goods, contributing to a cooling in core CPI. With a lag, a strong Canadian dollar will also provide a dampening impact on retail prices for imported goods and services.

“All told, Governor Carney will not fret about the stickiness of core inflation because, given time, core prices will come down. Look for headline and core prices to cross paths in the second quarter of 2010, at a level well under the Bank of Canada’s two per cent target. As a result, Canada’s inflation rate will be no threat to the Bank easily fulfilling its pledge to keep interest rates at a slim quarter point through mid-2010. In fact, market expectations for rate hikes in the first half of 2010 could be a full year too premature.”
Unlike the central bank’s outlook, the CIBC report does not see the Canadian economy gaining much benefit from a forecast U.S. recovery. It notes that the nature of the budding recovery will be very different than what we have seen in the past, with U.S. consumer spending taking a back seat to government stimulus. Source: CIBC World Markets.

Misty Harris, Canwest News Service Canadians are among the most optimistic in the world when it comes to feelings about the job market, personal finances, and readiness to spend, according to a newly released analysis of some 14,000 people in 28 countries.

The report, authored by market research firm The Nielsen Company, finds consumer confidence on a global scale has jumped five points, to 82, since March, with gains in 24 of 28 markets. Confidence in Canada climbed six points to 90, making our nation one of eight countries worldwide in which such lofty levels were achieved — Indonesia, India, Philippines, Brazil, Australia, China, and United Arab Emirates were the other countries.

Nielsen analysts conclude that the notion of recovery is finally taking hold, with most people feeling “hopeful about an end to the global economic downturn.”

Among the optimistic is Helen Goldstein, who lost her corporate wellness business, along with a third of her portfolio, to the recession.

“I feel very positive about the economy, and very positive about the ultimate effects of this (downturn),” says Ms. Goldstein, 62. “It’s been a really good lesson to look at what’s important in life.”

In May, Ms. Goldstein launched a new business venture — a Toronto social salon called Buddha Groove — and has since found that people are “spending, just spending in a wiser way.”

Indeed, the Nielsen report describes Canadians as being “among the world’s most responsible consumers.”

The proportion of Canadians using spare cash to pay down debt has dropped to 40%, from 47% in March, which analysts say is a “positive sign” Canadians are spending in other areas. The most popular of these include out-of-home entertainment (23%), holidays or vacations (23%), clothing (21%), and home improvement (20%.

Thirty per cent of Canadians are funnelling their extra cash into savings, while 11% are using excess funds to invest in retirement.

Almost four in 10 (39%) believe local job prospects over the next 12 months will be good or excellent — impressive, given the 331,000 Canadian jobs shed in 2009 alone — while slightly more than half (52%) feel the state of their personal finances will be good or excellent this year.

Notably, the Nielsen Global Consumer Confidence Survey was conducted June 15 to 29, weeks before the Bank of Canada declared the recession to be technically over.

“Recovery has started in Canada, so consumer confidence is going to reflect that reality,” says Ernest Biktimirov, an associate professor of finance at Brock University in St. Catharine’s, Ont.

Although bank closures continue to plague the U.S., with the latest casualties in Nevada, Alabama, Arizona and Pennsylvania bringing the 2009 total to 77, Canada’s prudent financial institutions are doing comparatively well. Building permits issued to Canadian contractors rose unexpectedly in June — the second consecutive monthly gain — and commodity prices are springing back.

But Mark Meldrum, an assistant professor in the Odette School of Business at the University of Windsor, Ont., cautions that “as quickly as someone can become confident, it takes one crisis to destroy it.”

Record 18.2% jump

Alia McMullen And Garry Marr, Financial Post

Canada’s housing market boomed in July as low interest rates and improving economic confidence sent sales of existing homes to a record for the month, despite generally weak economic conditions.

The remarkable turnaround from an almost frozen market at the start of the year has economists stunned, and while they predict activity will level out soon, the risk is continued low interest rates begin to stoke a house price bubble.

“We can’t rule it out,” Douglas Porter, the deputy chief economist at BMO Capital Markets, said of the possibility of a bubble. But he said the scenario was hard to fathom given the underlying weakness in the economy.

Even so, that weakness to date has not prevented a strong rebound in the existing housing market, which declined steadily throughout 2008 and hit a decade low in January.

Home resales increased by 18.2% in July compared with a year earlier, to reach 50,270 units — the highest July sales result on record, Canadian Real Estate Association figures showed yesterday. At this pace, the housing market is on track to be even hotter than it was in 2007, which was a record year. Seasonally adjusted sales have risen for six straight months to be up 61.2% since January and are now just 1.4% below the peak in May 2007.

But despite the spectacular gain, the level of activity in the first seven months of this year remains 6% lower than in 2008 when activity had already begun to decline. Mr. Porter said some of the rise in the month was a result of sales that had been held back from the start of the year because of the weak market conditions.

But homebuyers have swarmed back into the market because of low interest rates and more affordable house prices.

“Homebuyers recognize that interest rates and prices have bottomed out, and are taking advantage of excellent affordability before prices and interest rates move higher,” said Dale Ripplinger, the president of CREA.

A five-year fixed-rate mortgage, the most popular product among consumers, is still available for under 4% at some financial institutions. Variable-rate mortgages, tied to prime, remain in the 3% range and are not expected to rise until June. The Bank of Canada has promised to keep the benchmark interest rate at a record low 0.25% until mid-2010, provided inflation does not begin to rise.

The strength in the market has been felt right across the country. Vancouver sales last were up 90% from a year ago, while sales climbed 28% in Toronto and 28% in Edmonton. The strong demand in the country’s highest-priced markets has to some degree skewed the average price higher. The average price of a home sold on the Multiple Listing Service last month rose 7.6% from a year earlier to $326,832.

The strength in the resales market has not been echoed in the price of new homes, which fell 3.3% in June compared with a year earlier, Statistics Canada figures showed Wednesday.

Part of the pressure on prices has come from a decline in supply, which has fallen for seven straight months. New listings in July were down 13% from a year earlier to 73,444.

Economists are skeptical the housing market will be able to continue to post such strong growth.

“After improving markedly, affordability will deteriorate in coming quarters, and unemployment will continue to rise,” said Pascal Gauthier, an economist at TD Bank Financial Group. “New listings might well start rising again too. Combined, a larger supply and a softening in demand should cool prices in a delayed fashion.”