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The largest decrease in consumer confidence since the pandemic began was recorded this month by the Conference Board of Canada, an economic think tank.hocus-focus/iStockPhoto / Getty Images

Consumer confidence today is right where you’d imagine with inflation soaring, house prices falling, and stocks and cryptocurrencies getting whacked.

The largest decrease in consumer confidence since the pandemic began was recorded this month by the Conference Board of Canada, an economic think tank. Other surveys have found similar levels of pessimism, which makes sense in the context of all that’s going wrong right now.

Where logic breaks down is in current spending levels. Expenditures on goods and services are at levels well above prepandemic levels, but you don’t need statistics to tell you what’s happening. Just look at planes, trains and automobiles, and at restaurants and hotels. Say hello to the summer of spending and travelling.

We’ve earned this after two years of pandemic stress. But go easy because harder times are very likely coming. A financial challenge for the second half of 2022: How much money can you park in a high-interest savings account set aside specifically for financial shocks ahead?

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The Conference Board’s consumer confidence numbers are based on surveys of people who were asked how they feel about their current finances and future prospects. The May reading is the lowest since December, 2020, when we were looking ahead to a first holiday season spent in isolation.

One-quarter of those surveyed had a negative outlook on their finances in six months’ time, way above the 16.3-per-cent average since 2019.

Sohaib Shahid, the Conference Board’s director of economic innovation, said inflation caused the recent plunge in confidence, along with rising rates and geopolitical uncertainties like the war in Ukraine. There may also be an unwinding of the wealth effect felt in the past two years. With stocks, houses and other assets falling in price, people feel less willing to spend.

Surveys of the mood of Canadians about their finances are consistently skewed to the negative these days. Bloomberg News recently reported data from Nanos Research showing 41 per cent of people surveyed said their finances were in worse shape than a year ago, the second-highest reading since 2008.

For now, there’s a disconnect between thoughts and actions on money. The latest RBC Consumer Spending Tracker shows spending on goods and the combination of travel and hospitality recently hit levels roughly 30 per cent higher than pre-COVID (2019) levels.

Mr. Shahid said the travel boom is fuelled by pent-up demand from the past two years, and by an estimated $90-billion in readily accessible cash savings accumulated by households unable to spend normally during pandemic lockdowns.

“The average household doesn’t have as much savings as it did in 2020,” he said. “But savings are substantially higher than prepandemic levels.”

Not all of the money spent is coming from savings. Bank of Canada data cited by the Better Dwelling blog show debt held in home equity lines of credit grew in March at the fastest rate since 2013. Also, credit-card debt has started to rise again after contracting in the early part of the pandemic.

Today’s spending binge is a result of pent-up demand, and it’s a celebration of the pandemic hitting a down cycle as summer approaches. But it’s also disconnected from the economic concerns that are driving consumer confidence lower.

Former Bank of Canada governor Stephen Poloz said last week that we’re heading into a period of stagflation – a stagnant economy with high inflation. One of the factors driving stock markets lower these days is concern that the interest rate increases being used by central banks to ease inflation will push the economy into recession. And then there’s the question of what the pandemic will bring in the fall.

Ensuring you have cash parked specifically for financial setbacks would help if:

  • you lost a job or had your hours cut
  • you don’t get the pay increase or promotion you hoped for
  • soaring grocery and gasoline prices leave you without cash resources for unexpected home or car repairs
  • your mortgage renews with much higher payments, or your landlord jacks up your rent

More than a dozen alternative banks and credit unions offer rates of 1.5 to 2 per cent on savings right now, which means your after-inflation returns are in the red. What could be worse? Spending your way into an economic downturn without a thought to what could be a difficult stretch ahead.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.