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Canada’s annual inflation rate slid to the lowest level in 56 years last month, dropping more than expected for the second straight month to set overall prices 0.9 per cent lower than last year, Statistics Canada reported Wednesday.

The fall on a month-to-month basis was even more dramatic, as prices in July fell 0.3 per cent from the previous month, reversing the similar monthly increase registered in June.

Still, economists say there is little concern that deflation – a broad-based and persistent decline in prices that could inflict further damage on the economy – is setting in Canada, as it did in Japan during the 1990s.

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tax

The unpopularity of harmonized sales tax (HST) arises almost entirely because the PST has a long list of exempted items that will now have the PST added to the existing GST.

Here in B.C., the most vocal opposition comes from the tourism and restaurant sectors, already hard hit by the recession and higher dollar. Accommodation will be protected by an offsetting elimination of the hotel tax, but services such as domestic air travel, hair care, dry cleaning, accounting and even funerals will be subject to the additional 7 per cent. New-home buyers will pay the tax on purchases over $400,000 and all homeowners will see the HST applied to cable, telephone, gardening, repairs, renovations and heating fuels.

A recent headline in the Victoria Times Colonist captured the public’s reaction: “HST slams into wall of opposition .” An Ipsos Reid survey found that 85 per cent of respondents opposed the July 1, 2010, HST implementation. And critics’ mischievous portrayal of the move as bailing out big business on the backs of consumers seems to be a dream wedge issue for the Opposition New Democrats.

It’s not that Liberal Premier Campbell couldn’t have anticipated the reaction: Mr. McGuinty has endured similar opposition since Ontario announced sales tax harmonization in May.

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Consumer confidence edged slightly higher in Canada in July, according to a survey by the Conference Board of Canada.

More importantly, confidence didn’t go down. The July increase, while small, was the fifth month in a row for a rise, from the worrisome depths reached last winter.

The Conference Board’s index climbed a marginal 0.8 points to 82.9 – a level that is 12.7 points higher than at the start of the year when the recession was at its worst in Canada. The index was set at 100 in 2002.

The increase this year “perhaps [indicates] that consumers do indeed see a light at the end of the tunnel,” the Conference Board said in a press release.

Still, confidence is much lower than the levels near 100 reached last summer. And respondents had mixed feelings about their prosperity.

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Retailers are already feeling the pressure to keep prices low as cash-strapped consumers hunt for deals in the economic downturn.

Up until the financial storm last October, a stronger loonie had helped many merchants who import their products moderate prices, and still generate higher profit margins.

But the slumping loonie could push up merchants’ costs by between 10 and 25 per cent this year, said Tim McGuire, a director at management consultancy McKinsey & Company Canada. It could force them to raise prices or try to offset the expenses in other ways, such as cutting costs.

“The net result may be further pressure on margins, lower sales as customers resist higher prices, or both,” said Mr. McGuire, a retail specialist.

Added Perry Caicco, retail analyst at CIBC World Markets: “The slumping Canadian dollar might be the single biggest cost issue for most retailers this year.”

At about the same time that the loonie began to dive last October, retailers were locking into prices for spring, Mr. Caicco told investors this week. As a result, most of those programs will cost between 5 and 10 per cent more than a year earlier, he said. And in these recessionary times, retailers will have trouble raising prices, resulting in what may be “sizable margin hits” to sell the merchandise.

“The problem gets worse for fall and winter goods, since those entire programs were bought with weak dollars and are lapping a very strong [Canadian dollar] from last year’s purchase cycle.”

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Within minutes of the Bank of Canada decision on Tuesday, the Bank of Montreal appeared to be the first chartered bank to follow suit, announcing that it would be cutting its prime lending rate to 3% from 3.5%, effective Wednesday.

BMO was quickly followed by TD Canada Trust, CIBC, Royal Bank, Laurentian, and Scotiabank, which all reset their prime rates to 3% from 3.5%.

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For the 12-month period ended November, 2008, personal bankruptcy filings are up 10 per cent from the same period the year before, according to data released yesterday by Industry Canada.

And with job losses expected to mount, the rate of increase could rise as high as 20 to 25 per cent year-over-year in the year ahead, said Benjamin Tal, economist at CIBC World Markets Inc.

“You might actually say that it’s surprising that bankruptcies have already risen by 10 per cent, given the fact that we haven’t already seen the main driver of bankruptcies, namely unemployment, getting into more dangerous territory. This will happen in the course of 2009,” Mr. Tal said.

CIBC estimates the unemployment rate will average 7.6 per cent in 2009, and could reach up to 8 per cent during the course of the year. In November it stood at 6.3 per cent, a slight increase from the month before as the manufacturing sector in Ontario continued to shed jobs.

“In the previous recession consumer bankruptcies rose by as much as 45 per cent on a year-over-year basis. This recession is not a mild one, it is consumer-led, and that means we might see a much more notable increase in bankruptcies than we have to date,” Mr. Tal said.

In the 12 months ended November, 87,981 Canadian consumers filed for bankruptcy compared with 80,050 in the same period the year before, according to Industry Canada’s data.

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But this is different.

In a report to be released today, The Boston Consulting Group has found that while the U.S. economy has been put to rout, and while Canadians are in a structurally superior position headed into recession, it is the Canadian consumer who intends a more dramatic pullback in spending.

In a survey of 1,000 Canadian households, the consulting firm found that 62 per cent of respondents intend to cut spending through the course of 2009. By comparison, 58 per cent of U.S consumers plan spending cuts in the 12 months.

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