Canadians are likely to put the brakes on spending this year, according to a new index by CIBC World Markets that measures consumers' ability to spend versus their willingness to do so.

The Consumer Capability Index anticipates lowered spending because of the expected rise in interest rates and the fact a large part of consumption has been driven by cheap credit in the past decade.

"Growth in real disposable income has been trending downward over the past year, and to a certain extent debt is replacing income as a major driver of consumer purchases," Benjamin Tal, senior economist at CIBC World Markets Inc., said Thursday in a news release.

Tal compared the Consumer Capability Index with the Consumer Confidence Index, which is measured monthly by Conference Board of Canada. He found the average gap between the two measures during the 1990s was minimal. Consumers were confident about the economy and had the ability to spend.

However, increased reliance on credit and surging real estate prices over the past decade has changed that paradigm. Consumer confidence is up, but these days, households strapped with record debt levels are tapped out.

The Bank of Canada has indicated it will raise base rates early this summer from historic lows. And this week, the Royal Bank of Canada and Toronto Dominion both announced significant rate hikes for mortgages.

"The practical implication of the reduced consumer capability is that consumer spending will disappoint in the coming 12 months," Tal said.

CIBC's Consumer Capability Index looks at seven key macro-economic factors to measure the ability of Canadian consumers to continue spending.

• Debt-to-income ratio.
• Debt-to-asset ratio.
• Real income growth.
• Long-term unemployment rate.
• House price to income ratio.
• Personal saving rate.
• Personal bankruptcies.

The CIBC report found that the household debt-to-income ratio in Canada has continued to climb. As of December 2009, the ratio was accelerating at a rate not seen since the mid-1990s.

The rising importance of debt as a determinant of consumption can be seen in the fact the 2008-09 recession was the first economic contraction on record to show overall expansion in real household credit, again demonstrating the effectiveness of Canadian monetary policy, the CIBC report said.

"On the other side of the equation, the recent improvement in the saving rate since 2008 is a positive development, since savings can act as a buffer between the economic downturns and individual finances," Tal said.