Canadian business and consumer expectations for inflation over the next few years are at a record high, according to the country’s central bank, a worrying development that will prompt bets for more aggressive rate hikes.
The Bank of Canada’s quarterly survey of executives and firms released Monday showed near-term inflation expectations are rising, with price pressures expected to last longer as the country faces tight labor markets and companies hit by rising costs of production resources.
The rising outlook for spending and inflation underscores the urgent need for Governor Tiff Macklem to quickly withdraw stimulus from an overheated economy amid concerns that price pressures are deepening.
Expected price gains are a key driver of actual inflation. Businesses are raising prices, and workers are seeking wage increases, in part based on their expectations of what costs will look like going forward. In other words, the higher inflation is expected to be, the higher it will be.
Markets are almost fully pricing in, with the central bank set to raise its key interest rate – currently at 1.5 percent – by another 75 basis points in its July 13 decision. The bank is expected to raise it to 3.5 percent by the end of this year. The prime rate was just 0.25 percent in March.
The survey of executives paints a picture of businesses facing unprecedented challenges in meeting demand, with the economy stretched to its limits.
On a positive note, the central bank said it still has confidence the Bank of Canada can meet its inflation target and that price pressures will eventually ease.
More highlights:
- Consumer inflation expectations rose across all time horizons, with one-year and two-year records hitting records. Five-year inflation expectations also increased significantly, but still remain slightly below pre-pandemic levels
- The central bank said consumer spending could be hit by higher inflation, with confidence falling and with households still expecting only a modest rise in wages. Wage gains expected by businesses are higher than expected by households
- About 78 percent of businesses expect inflation to exceed 3 percent over the next two years, a record. That’s up from 70 percent three months earlier
- While businesses expect sales growth to slow, demand conditions remain good
- Firms are constrained by labor shortages and supply chain bottlenecks “suggesting that supply is not keeping pace with demand”
- Businesses expect “significant” increases in wages and prices, with supply chain bottlenecks now expected to last longer. Investment intentions and hiring remain high, but so do wage expectations. The average expected wage increase is now 5.8 percent next year, a record
- A broad gauge of business sentiment fell slightly but remains at historically high levels. The central bank’s composite indicator of business conditions fell to 4.85 from 5.01
- The Bank of Canada said uncertainty surrounding the economic outlook has increased over the past three months. “Most businesses see this uncertainty as creating risks to their outlook, but not yet further affecting their operations or sales expectations”
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