Weakness in the Canadian dollar is often regarded as a concern that could drive inflation, but a report by RBC Economics says it is unlikely to have the material impact on inflation that is feared. 

Canada has broadened its imports beyond the U.S., which has made it less vulnerable to the rise in the American dollar, the report outlined on Wednesday. It also stated that roughly 80 per cent of consumer services in Canada are produced domestically.

“A weak Canadian dollar won’t derail inflation trends that are now heading in the right direction,” it said.

Inflation decelerated in Canada to 4.3 per cent in March on an annual basis, marking the slowest pace since 2021, according to Statistics Canada. 

RBC's findings showed that of the $105-billion Canadians spent on food in 2021 for example, $22-billion was imported. It also showed that while the U.S. market still remains Canada's largest trading partner, other markets — notably China, are growing their Canadian market share. 

“Cheaper imports from other large trading partners like China should have at least partially offset some of the pressure brought on by a stronger greenback,” the report detailed. 

If inflation should rise, the RBC economists argue that it will likely be because of demand and not a weakened currency. 

The bulk of consumer spending is coming from services in Canada, and at the moment, consumers are spending less on these services as high costs and elevated interest rates keep them on the sidelines, the report stated.

“In an increasingly services-dominant economy, demand, not currency, will decide where prices go,” it said.