Much of the excess savings that built up in Canadians’ bank accounts over the course of the pandemic - and that Finance Minister Chrystia Freeland has referred to as “pre-loaded stimulus” - is being quickly eroded as inflation hovers at three-decade highs, according to a Bay Street economist.

“In today's world, after all of this inflation, you need to adjust those numbers for the purchasing power in terms of inflation. Inflation has eroded or offset the purchasing power of that excess savings,” said Royce Mendes, managing director and head of macro strategy at Desjardins, in an interview on Wednesday.

One report published by CIBC Capital Markets in mid-November 2020 estimated that individuals and businesses were sitting on a collective $170 billion in excess cash as spending was restricted by lockdowns. It was also an amount that was being eyed by the federal government as a way to eventually kick start the economy from the COVID-19 pandemic.

Freeland called it “pre-loaded stimulus” in her fiscal update speech in late 2020 in the hopes that Canadians would unleash that cash once the economy opened up.

But that was before the prolonged surge in inflation.

“So there is not $100 billion or $300 billion of extra purchasing power. There's a fraction of that because of the extra inflation,” Mendes said.

“I still think that there's some cushion in the bank accounts of Canadians to weather the storm are likely the rest of this year in terms of cushioning Canadian household finances against higher interest rates or higher inflation but I think 2023 becomes a much more precarious situation for the Bank of Canada to navigate.”

Mendes also pointed out that wage growth was not keeping up with the rising cost of living, putting additional pressure on household balance sheets.

The latest inflation data on Wednesday showed consumer prices surged 6.8 per cent in April on an annualized basis, slightly hotter than the average economist estimate. 

Mendes said he’s expecting inflation to continue rising in the six to seven per cent range throughout the summer, adding to the urgency for the Bank of Canada to get that key economic indicator under control.

“I think the Bank of Canada should give the economy the appropriate dose of interest rate hikes in the near term rather than waiting and letting the economy get sicker with higher inflation becoming more persistent and needing a more aggressive dose of interest rates down the road,” he said.  Mendes expects the Bank of Canada to raise interest rates by a half-percentage point at the next rate decision in June.

While Bank of Canada Governor Tiff Macklem is open to half-point hikes, Mendes said he “found it surprising” that Macklem signalled he likely wouldn’t opt for a hike larger than that considering the current inflation picture.

“Of course, [rate hikes are] not going to do anything for global energy prices. This is not going to do anything for high food prices that are the result of the war in Ukraine. This is not going to ease supply chain disruptions,” he said.

“But the unemployment rate in Canada is at a record low. And what the Bank of Canada can do by raising interest rates is create more of a balanced economy relative to the very overheated economy we currently have right now.”