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Sunday, November 18, 2007

Inflation or Deflation? - Canada Will Begin to Experience Deflation

Although inflation concerns are proving to be a concern due to rising commodity prices, other sectors of the economy such as retail prices and imported goods rasises the possiblity of a deflation scare are climbing in Canada.

Goods prices are already firmly in deflationary territory. Service sector inflation (outside of housing) failed to overly inflate during the boom, and is likely to lower in eastern Canada with the economy growing at a sub-par pace. Retailers are in price discounting mode. Inflation is not going to be a constraint on the Bank of Canada, and I expect rate cuts ahead, especially with the credit crunch continuing to roll on in the US.

As a matter of fact the bifurcating economy will result in the deflationary pressue of the non-commodity producing sector to overtake the inflationary pressure from the commodity sector resulting in a defaltionary bias.

This should provide a lift to interest sensitive securities over the coming months. I especially feel that Canadian REITS will be one of the first beneficiaries of this trend.

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