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Why Canada's Inflation Rate Is Bad News for Banks

On Sept. 19, Canada reported inflation rates increasing to 4.0%. Food prices rose by a troubling 6.9% while rents increased by 6.5%.

Canadians will have lower disposable income with these inflation rates. It hurts their spending power, which will decrease the demand for goods. The economy will slow, hurting Canadian banks the most.

In the last quarter, banks like Royal Bank (RY), CIBC (CM), and Bank of Montreal (BMO) increased their provisions. They are bracing for loan defaults in homes and automobiles. BMO exited the loan business in the U.S., too. Shareholders are holding increasingly risky bank stocks that are less diverse in their loan portfolio.

High Taxes

Canadians faced too many taxes over the years. The clean fuel tax increased their costs. As winter approaches, people have to contend with heating bills. So, for the next two quarters, investors should brace for weak demand for goods outside of the energy sector. To hedge for a profit slowdown in financials, discretionary goods, and retail, consider the energy sector.

Suncor Energy (SU) is an inexpensive oil and gas integrated firm that trades at a price-to-earnings ratio of 10 times. Enbridge (ENB), despite its downtrend, is still fairly expensive. However, its dividend yield is above 7.5%.